Wow, that hit a nerve! A lot of the points raised (eg the defence of the EMH) are addressed in the book, but I will respond to the accusation of cherrypicking, and specifically the claims regarding social mobility.

Since this is a direct quote from Haskins and Sawhill of the Brookings Institute any claim of cherrypicking should be addressed to them. But if "Simplulo" knew anything about the subject (or could even bother using Google), s/he wouldn't have bothered with such a silly suggestion. The fact that the US has lower social mobility than European countries in general (not just Scandinavia and the UK) is so well-established that (AFAIK) the professional explainers-away at rightwing thinktanks have chosen to ignore it (secure in the knowledge that most Americans are unaware of the facts), rather than to challenge it.

Could it be possible that John's retort was even worse than this article? Yes.

Simpolo is right. If John disagrees with the EMH, he could easily open a fund and trade on this. However, I'm pretty sure that John is as lazy as his analysis suggests thus this scenario is not about to happen anytime soon.

Two points:

1) The financial crisis showed that EMH worked, not the opposite: as soon as people found out the full extent of the banks' bad assets, prices fell dramatically. If EMH had failed, there would be no such collapse in the market.

2) the EMH is a paradox: In order for markets to be efficient, traders have to believe that they are inefficient and their trading activity moves prices to efficiency.

P.S. The "cherry" on top was John's call for nationalization of industries. We know of the great success stories of nationalization in Cuba and Venezuela and thus it is best to emulate their shining examples. LOL

Seriously, John is surprisingly more naive than the bigot Barbara Crosette. One must wonder why Foreign Policy considers either one's opinions as having merit.

SIMPLULO RULEZ! QUIGGIN DROOLZ!

Voting yourself the fruits of other peoples labor is stealing. The problem is obvious: If you do not get to keep what you make why make it? Especially, when your earnings gained by sweat and pain are confiscated and given to people who so often are sober challenged? Even Fidel Castro (yes from Cuba) admitted this week his communism idea has failed in Cuba. Google Castro, lay offs, government failure, etc.
Peace and Coexistence

I registered just to reply to this comment. Obviously this is not a finance forum, so I will forgive anyone for not understanding EMH. There are actually various forms of EMH, Strong, Semi-strong, weak and etc(any other academic variations that are cooked up). Strong form EMH says you can not be a successful inside trader, while weak form EMH says you can. Strong form EMH has been debunked, i.e. the recent scandal regarding the money made by Raj Rajaratnam through insider trading, and all the others (let's add Martha Stewart for comical effect). On the other hand, Weak form EMH seems to hold up very good (if you don't like to the technical analysis folks). In other words, both of you are technically wrong. Certain portions of EMH are simply hog-wash and wouldn't hold up in a serious financial discussion while other parts seem to hold true! Let's not let politics get in the way of facts, unfortunately it seems that's the direction we're headed.

Simplulo, please see explanation of EMH below. Also, large inequalities are most often a result of systemic structural issues if you believe in the normal distribution of set outcomes.

"The problem with our liberal friends is not that they do not know anything. It is that so much of what they know is wrong".

The problem with the Quiggin article is that it is overly academic, and fails to comprehend the very basics of economics. Quiggin needs to be schooled by Vince Lombardi - "gentlemen, this is a football". Quiggin, "this is money".

Economics is simply the exchange of value of goods and services. Our economic system, worldwide, has become a behemoth that forgets this basic fact. The fact of the matter is, a person that produces valuable services, such as a plumber, an electrician, an engineer, a doctor, or a lawyer, or a person that produces goods, such as a farmer, a miner, or a manufacturer, contributes to the economy. A person that provides only economic services, such as a Wall Street trader, simply facilitates the trade process, and produces nothing. A person that trades money, such as a banker, is a parasite on the economic system. A person that functions simply by taking "entitlements", and consuming more than it produces, is also a parasite.

An economist that teaches ideas that are unproven and contrary to common sense is worse than a parasite. He is a disease, as are his ideas.

Some parasitic functions are necessary to sustain a system, but when the system becomes something that rewards the parasites above the producers, it is unsustainable. The parasite infested body wastes away and dies. The parasitic infested economy wastes away and dies. THAT is our fundamental problem.

Quiggin desires to restructure the economic system to redistribute wealth. That cannot be sustained in any system. When government (which is also a parasite) controls the wealth and attempts to take from the producers to give to the non-producers (no matter how pitiful and piteous they are) this parasitic function saps the strength of the basic economy, because the worker becomes discourages and produces less. Why should I work hard to earn a living, if what I earn is going to be taken away by the massive parasite, and given to the cancer of society - the perpetually poor who refuse or have insufficient intellect or drive to become producers? Or, for that matter, when it will go to a banker, or a government employee, or a politician, all of whom are parasites? Hence the failure of socialism, and the proper diagnosis of Progressivism as a lethal disease on society.

The Free Market System is a system that starves out disease in society. It is ruthless, it leaves no safety net, and it eradicates members that do not produce - even if that lack of production is only for a short period of time. This is the failure of the Free Market system. Take the finest athlete, strong and lean and trim, and liken this to the economic system of the Free Market, when it is functioning well. Any loss of ability - a natural disaster, for example, will wipe it out, just as lack of food for a short time will kill the athlete that has no fat reserves.

We have attempted in our society to temper the free market system with "fat reserves" - safety nets that help producing members of our society in lean times. It is essentially an insurance system. In this measure, our entitlements are a good thing.

Unfortunately (globally), the system is fraught with failure, and whole clans have become welfare dependent, generation after generation. We establish difficult protocols to obtain the benefits, and these parasites of society become experts and negotiating the protocols, but those that need help (and should get it) cannot navigate the bureaucracy. Our system fails. We are too compassionate - and our compassion has become utterly foolish.

Whole segments of society have developed that sap the strength of our wealth - government is such a large employer that it actually controls whether jobs are gained or lost in a given month. Unbelievably, we have seen reports recently that say "job growth occurred in the US this month, although the private sector lost jobs. The growth occurred in the government sector". That is INSANE. But, it is accepted over tea and crumpets without stress.

There are simple solutions to complex problems, but they are very difficult to implement. If you want economics to rebound, start with "if a man will not work, neither let him eat". Move to "do you see a man with a skill? He will stand before kings, he will not stand before obscure men". Go from there to "do unto others as you would have them do unto you". Such men as Paul, Solomon, and Jesus had the right idea. (Funny how the Creator of man knows how to prosper man. Funnier still how men such as Quiggin prefer to destroy man. Absolutely hysterical is the fact that men prefer to follow the latter.)

We will not implement these simple ideas. Our economic systems will be driven by the ridiculously complex and incomprehensible ideas of men such as Quiggin, whose intellectual capacity is so great and education so immense that they have become utter fools, and useless in the real world. Occasionally, the "zombies" of common sense will rise for a time, but they will be put down forcefully, even with ridicule, by these intellectual elites (who are the worst parasites of them all). They will eventually hit on something that will cause a bubble of incomparable size. When it collapses, men will weep for their loss. They will not recover.

"When the kings of the earth who committed adultery with her and shared her luxury see the smoke of her burning, they will weep and mourn over her. Terrified at her torment, they will stand far off and cry:
" 'Woe! Woe, O great city,
O Babylon, city of power!
In one hour your doom has come!'

"The merchants of the earth will weep and mourn over her because no one buys their cargoes any more— cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble; cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and bodies and souls of men." - Revelation 18:9-13

And I will be content to watch it burn.

Talk about being dead wrong! Fannie and Freddie were NOT at the root of the sub-prime crisis. This is disinformation spouted by shills and ignoramuses. Sub-prime loans were originated by the unregulated private banking sector. In fact, neither Freddie nor Fannie originated loans, period. They bought loans from the private sector, or guaranteed interest and principal payments on MBSs issued by the private sector that rested on mortgages originated in (drum roll, please)...the private sector!

Nor did either Fannie or Freddie ever press banks to originate sub-prime loans. The private sector did that all by themselves. Fannie and Freddie may have relaxed the standards in their Seller-Servicer Guides, but at most--or at worst--they only approached the standards of the private sector. Sub-prime loans came from WaMu, IndyMac, Wachovia, Wells, and all the other private sector banks.

Neither Fannie nor Freddie ever told anyone to not verify borrowers' income or to inflate appraisals. They never ordered any bank to issue "no doc" loans. These were private-sector "innovations." Mortgage toxicity is a purely private-sector innovation.

Simpulo's error is so egregious as to call into question anything he writes on thus subject.

"If John disagrees with the EMH, he could easily open a fund and trade on this. "

You couldn't have made Quiggin's point better. Quiggin almost surely does not have access to the capital necessary to `open a fund and trade'. That's exactly the sort of glib but completely unrealistic thinking that lies behind nonsense like the so-called Efficient Markets Hypothesis. There is a cost to opening a fund, and its huge, and hugely out of the reach of most very smart folks.

Medical sector privatization leads to shoddy workmanship base on the need to improve the bottom line. substandard materials have been used in private hospitals as well as the need to increase patients moving through leads to more human error during procedures. The free market cannot control hospitals as poor service reduces population. The free market relies on many choices from an individual, bad medicine only allows for one bad choice.

The legal industry does not produce product, it is a direct (however private) arm of government. the goal of the legal industry is to interpert laws created by the government it is also a parasite however in the democratic system is nessecary to provide critizism to the law makers. Please do remember your elementary school teaching. Government requires an executive branch, judicial branch, legislative branch. Lawyers fall into all three and only serve to intrepert laws.

The banks being a drain on society, spot on.

Where your solution goes wrong is the population. Back at the turn of the century scores of people were employeed to do nothing more the what excel does today. Those workers when replaced did have a skill but was deemed useless by the free market. Your darwinian laws on the topic dictate these workers should merely die off. But I'm sure there's something in your scriptor to argue that point.

All JQ really needs to do is to show, using evidence, that markets are inefficient to the point where he can successfully trade on that. Any bank or hedge fund that has vetted this strategy out would pay JQ to trade on that. Obviously JQ is incapable of that type of analysis and Payoso is clearly using the "I'm not rich enough" excuse for JQ's horribly flawed analysis.

BTW, the financial cost for JQ to find a strategy that shows markets are inefficient? If he has been studying markets, zero and if he hasn't, the cost of historical data, which would be negligible compared to the cost of finding a sustainable strategy that exploits market inefficiency.

You're right Fannie and Freddie didn't cause the 'housing crisis' (more aptly termed the mortgage lending crisis), but neither can the 'free market' be blamed.

In the 1970s, 80s, and 90s the big news story was that lenders were 'red-lining' low income neighborhoods, in effect practicing what was claimed to be racial discrimination. (The banks weren't discriminating by race, but rather by credit worthiness of borrowers. But politicians on the left grandstanded, crying "racism!" in order to get more votes).

To solve the 'problem', President Carter created the Community Reinvestment Act, which monitored banks' lending to minority neighborhoods and threatened them with sanctions if they did not improve their practices. But the original CRA didn't really have any teeth.

Then in the 1990s, President Clinton put real teeth into the CRA. Banks were not only encouraged, but required by law, to write an equal number of mortgages in minority neighborhoods, as in "white" neighborhoods. Because minority neighborhoods were filled with borrowers without sufficient income or credit worthiness, the sub-prime loan was invented. It was born out of necessity in order to comply with the new, much more strict Community Reinvestment Act.

Guess who was the big promoter of strengthening the CRA? Barney Frank.

"Maybe inequality results not from preferences for the rich, but increased burdens on the poor? " it does not exclude each other. Most probably both factors are in the game - the rich are prefered (bush's work) and the poor are taxed because of growing war budget.

"Maybe the poor experience barriers to work entry from increasing regulations?" - maybe, but also maybe when the public schools are shity, you'll probably won't get a decent job. But who has money for a private school, right? Definitely not the poor. They won't get decent education, they stay poor. Catch 22.

"Left's most standard dishonest tactics: comparing the US to individual Scandinavian countries" - angry what you see, eh? About the cherry-picking...who's still comparing the leftist ideas and USSR (Soviet Union). Who's using Venezuela, Cuba, KLDR and all those shity countrie to compare them with democratic leftist politics. Btw. USSR wasn't even socialist country, not even communist - at least by the book. It was some kind of party-bureacratic totalitarism with communist rhetorics, but without it's ethos and policy. Most of property belonged to party and it's prominents. And that's far from communism. And i'm sure most leftist would agree that communism is not the way. Socialism on the other hand...

"Funny how leftists hate monopolies, except when that monopoly is the government" - what monopolies r u talking 'bout. Monopoly to military capacities and assets, monopoly to violence. I thought that's social consensus about that. What about public services. Do you know they're non-profit and usually unable to make any profit. I wanna see any company who would put money in unprofitable venture. And if there are no public services, would you build that road yourself, would you pay for the traffic lights to some corporate fund, would you cancel IRS and hope that people and corporations have will pay their taxes out of goodnes of their heart, woud you let your mum die of some disease because you have not enough money for healthcare. I don't think so.

"Wow, Quiggin even opposes privatization! In other words, he supports socialism, the real kind, with the state owning the means of production." - cool down, the world is not black and white, there are shades of grey. He don't oppose privatization, he merely says it's not 100% cure for all economic problems and deficiencies. You probably know "socialism" from FOX News. In fact socialism is a way of transfering resources and assets the most honest way with emphasis on social equity. The motivation to create and multiply resources should be not based on one's ego, but rather social appurtenancy. But ego is not neccesarily a bad thing if it would be driven by desire to reach better social appurtenancy. Hight taxes are neccessity. Good social capital and social consensus also. If one's want live comfortably in sound, solid and cohesive society, he should give up something. If it's the larger part of his economic resources he creates and not his freedoms, i don't thing it's much of a sacrifice. And SOCIALISM DON'T MEANS POVERTY. One of the lame myths spreaded by neocon's neoliberal's and so on. It's how you run your state, not what economic regime you have. You could call most of the Europe social-democratic and Canda too, yet they have great wealth and are being on the top in the Quality of life Index. Wouldn' it be for those Wall Street greedy bastards, western states intenstive spending without regard to fiscal deficit and lowering taxes mainly for rich, a crisis would not come and with it a crisis of social state attacked by bankers, financiers and other "ego and money first" vultures. I held a respect for John Quiggin.

From Wikipedia, the free encyclopedia

Marxism is a political philosophy, as well as an economic and sociological worldview, which is based upon a materialist interpretation of history, a Marxist analysis and critique of capitalism, a theory of social change, and a view of human liberation derived from the work of Karl Marx and Friedrich Engels.

Simplulo said nothing about the TEA Party. What is this, if anyone speaks conservative values, or implies that they are Taxed Enough Already, they are member of the TEA party?

Sam, would you mind pointing out ONE example of Leftism that hasn't ultimately resulted in totalitarianism? (No fair pointing to the current ones - the river hasn't reached the sea yet.)

If the economy is too complex too undestand and the economic interactions too, why would anyone care to invest in stock exchange, predict growth or fall of HDP and do not throw all economic knowledge out of the window. Austrian economist believed that man acts only rational and that market acts purely rational. How Hayek, Friedman and Mises can say that markets should be left alone when they on the other hand say they can't be understood.

"Alsef: Are you kidding? Suggesting that if Mr. Q. is so smart, he should start a mutual fund?! He just finished pointing out that stock picking, unless rigged up somehow, is a lot like throwing darts. "

Yes, the reason stock-picking is like throwing darts is because markets are EFFICIENT. Wow. How obvious is that. TY and JQ for proving market efficiency

"That was a great article. "

Yes, idiots would think like that.

The market has its uses; if it is so efficient, let's use some of this vast wealth to put a floor under the poor proles who do all the work, when the inevitable bubble bursts. If thats "Socialism", well , human nature is sociable by nature..."

We do that already. We already have a social floor. We don't need to deny economic reality or nationalize industries in order to maintain a social floor.

BTW comparing "sociable" with socialism is just weak even by a half-wit like yourself. If socialism were so "sociable" then why are the most socialist countries the ones with the highest body counts. Not very "sociable".

So, you think the gov't needs to make pencils and have it's own paper mill huh? There is a difference among contracts. Defense contractors vary too, but we really only have two airplane manufacturers of fighter jets and bombers, that creates a monopoly and a "problematic" industry. I believe that we have not a "Free Market" but three markets.

First of the three is the free market, and here all the bromides are correct. There is ample competition and alternatives. This competition suppresses prices and the power of the providers. The customer is always right. These are restaurants, cleaners, gas stations/convenience stores and the like.

Next, there's the professional market, here, there are no alternatives, but there is competition. This reduced competition tends to be accompanied with higher prices. see plumbers and electricians versus the landscaper and handyman. In this market the customer isn't always right, they're buying expertise, so they don't necessarily know if they were well served.

Finally, we have the utility/monopoly market. These by definition enjoy essentially no alternative and no competition. Here, totally socialized models may rationally compete with private enterprise. The deregulation of electricity and the stable example of still totally socialized water offer stark contrast that the latter ain't all crazy. Further, let's consider the many gov't provided subsidies to these institutions. To allow those varied supports to be fully privatized is the worst sort of socialism--for the wealthy. Consider that gov't often commissions these essential services, backs the funding with loan guarantees, issues specs, licenses, and various regulation--all this is appropriate and essential considering the externalities involved in ubiquitous, essential industries like utilities.

It is in these markets exclusively, I'd argue, where gov't can rationally exist. I'd argue that taxes should be much higher--50% or higher in incomes exceeding $2million/yr. The only people affected by this would be the corporate executive MANAGEMENT. These low Reagan tax rates have sucked vast wealth out of this country. And no entrepreneur would be affected by these rates, as reinvestment, hiring or capital investment off-set these gains. Corporations would also expand their workforces, reinvest in capital improvements, build new factories. Call it protectionism, but it's not crazy to tell brands that if they want to sell in the US they need some manufacturing here. Companies have China and Japan policies, they can have US policies too--especially since we're the best damned consumers in the whole world!

Anyway, there are two markets that are multi-layered amalgams of the last two, they are health care and retail banking. Perhaps both of these could be nationalized to the betterment of the nation as a whole. Bankers used to earn modest but good livings, their exploitation of fees on the least of their customers has earned them a shameful booty. Their reliance on gov't insurance is a huge subsidy, they are allowed to charge more for small amounts of money than outlawed lenders.

There are no private medical schools. Once we decide to treat anyone regardless of ability to pay we've departed the market. But there are rational self-serving reasons to treat these people regardless of ability to pay. They may be contagious, and are certainly more productive healthy than ill. Hell, we'd save some indigent gunshot victim just to get him to testify in court.

Finally, if you think the market knows how to value things, you need to research the CFTC, the Enron Exemption or London Loophole, which were inserted by Phil Graham in an act known as the "commodities futures modernization act." Bill Clinton and his adviser Rubin supported the clause which has the fed's cheap money driving our oil markets to contango. The last great contango event precipitated the economic collapse in 08. On that note, have you ever seen gas prices rise in Sept. Oct as they are now? Remember, this is after the busy Summer driving season. And, supplies and reserves are at all time highs. Even that Gold you're holding is inflated.
we have sensitive technology that

"As for the efficient markets hypothesis, it's has to believe it when a house is worth $400,000 in 2001, $800,000 in 2007 and $400,000 in 2008."

Actually you just showed that given new information, the price of the asset changes. Seems efficient to me. The house dropping in 2008 given the changing state of the economy proves this market is efficient.

What is inefficient is being tied to the idea that housing prices should always go up at a smooth rate. This is fiction.

I sound like a con man? Well, it's too bad I'm not selling the Brooklyn Bridge then.

Glass-Steagal's repeal had pretty much nothing to do with the financial crisis, sorry. The crisis was caused by a combination of the artificially low interest rates, sloppy underwriting standards, and a massive illusion of crowds. You are certainly similar to Quiggan in that you provide a simplistic 'cause and effect'. If I die tomorrow, it will be eleven years after the effective repeal of Glass-Steagal, but I doubt that it would make much sense to blame my death of Glass-Steagal's repeal (unless I am killed by Barney Frank jumping out of an office building just as I am walking by).

Those trillions of dollars of mortgage-backed securities couldn't have been passed around between banks, insurers and investment houses if Glass-Steagall walls were still up.

Banks have always invested in mortgage-backed securities; Glass-Steagal's repeal had nothing to do with the tidal wave of easy money and government-backed credic that eroded lending standards and led to massive defaults. In any case, the financial crisis was managed reasonably well by both the Bush and Obama administrations. The economy was sliding into recession as the limits of fiscal irresponsibility was reached; the credit crisis simply made it the recession a bit worse and the recovery a lot harder.

I just learned you are an economist, so I take back that last paragraph. Still, I think you're wrong, but I apologize for my ignorance.

A good point-by-point dissection of this highly flawed and obviously partisanly-motivated article.

What I don't understand is that the author is apparently an economist, but he provides a propagandized version of all of these ideas, which are, mostly, useful in limited circumstances. To complain that the efficient market hypothesis is bollocks because prices are volatile is like saying that Newton was a fool because Newtonian physics break down in the extremes of a black hole or the speed of light. They do - but that doesn't mean that on earth, an apple won't fall from a tree.

Unlike most of the criticisms in the thread above, Zaotar deserves a serious response, so here it is

1. Great Moderation. As is indicated by the link at the bottom, this article is a (very brief) summary of my book which contains exactly the kind of material you are asking for.

2. EMH Not only have many people defended the most extreme versions of the EMH, they have done so in this very comments thread - see for example Simplulo and Freetrader. Again, teasing out the distinctions between various versions of the EMH and their implications takes more space than can be had in article, but is done in detail in the book

3. DSGE You've somewhat missed the point here. The chapter is not primarily about taking sides in the debate between Keynesians and their opponents, but in criticising the way in which economists have paid much more attention to the formalism of micro-foundations than to work that would actually help to illuminate the debate

4. As with EMH, strong versions of trickle-down theory were very much alive in the pre-crisis years, even if there was already a fair bit of scepticism about them, as instanced (again) by the various libertarian commenters in this thread.

5. Yet again, you seem to demand a level of precision that could not possibly be achieved in the space available, without bothering to wonder whether the topic might have been addressed in more detail in the book.

Overall, this is a careless reading of the article, taking the most uncharitable view at every possible point. A trivial instance is the fact that you can't even be bothered spelling my name correctly.

Given that you can't manage such a simple task, your willingness to prefer your prejudices to evidence on science and economics is unsurprising.

von Mises, Hayek, Friedman, Schumpeter and so on. Stab them, stab them, stab them in the heart...just stab them.