Eugene Fama on bubbles and the '29 and '87 stock market crashes

The way I look at it, there were two crashes in the last century. One turned out to be too small. The ’29 crash was too small; the market went down subsequently. The ’87 crash turned out to be too big; the market went up afterwards. So you have two cases: One was an underreaction; the other was an overreaction. That’s exactly what you’d expect if the market’s efficient.

The word “bubble” drives me nuts. For example, people say “the Internet bubble.” Well, if you go back to that time, most people were saying the Internet was going to revolutionize business, so companies that had a leg up on the Internet were going to become very successful. I did a calculation. Microsoft was an example of a corporation that came from the previous revolution, the computer revolution. It was hugely profitable and successful. How many Microsofts would it have taken to justify the whole set of Internet valuations? I think I estimated it to be something like 1.4.

~ Eugene Fama, "Interview with Eugene Fama," November 2, 2007

Doug French on a Bill Bonner speech: "Mathematical modeling is based upon conceit and pretension"

Bill Bonner provided a clear analysis of how the current crisis was engendered in his speech played for the [Doug] Casey faithful during the Wednesday night banquet. When Richard Nixon closed the gold window, the US dollar was then "based upon a fraud," and with central bankers being human, from that point the dollar would be made worthless. The next villain in Bonner’s story is Eugene Fama, who formulated the "Efficient Market Hypothesis," or in other words, the market knows everything, prices just move randomly. Since Professor Fama’s work was published, securities prices became natural phenomena that are supposedly not influenced by human behavior. Thus, stock and bond price movements could be mathematically modeled, and that risk isn’t risk anymore, but volatility.

From this thinking came the derivatives industry that is based upon models devised on historical market statistics during time frames that didn’t include a fiat currency regime, let alone the presence of $500 trillion in derivatives. This mathematical modeling is based upon conceit and pretension, according to Bonner, and the turning of Level 3 assets into AAA-rated paper were "miracles that would stagger Jesus Christ."

~ Doug French, "V.I. Bernanke," LewRockwell.com, April 1, 2008