An Excellent Nobel Prize for Angus Deaton–But Was Eugene Fama Always Such a Total [Redacted]?

A truly excellent economics Nobel Prize–I have learned a lot from Angus Deaton.

And I look at my desk and see my copy of Akerlof and Shiller’s Phishing for Phools that I am halfway through on my desk. And I think about the panel I was on with Paul Krugman at New York Comic Con yesterday. There is a subset of economics Nobel Prize winners who are true geniuses, from whom I have learned and continue to learn an immense amount.

But then I turn to my computer to sort through my unread browser tabs.

And the first thing that comes up is: Eugene Fama:

And all I can think is: “What a maroon!”

I first remember becoming really aware of Eugene Fama in the aftermath of the stock market’s Black Monday in 1987. He and Merton were out there in its aftermath opining that the 25% fall in the value of equities on Black Monday was a rational revaluation in response to that day’s market news–it was just that we economists were just not smart enough to figure out what that news was that the marginal trader on Wall Street had learned that day, but it was probably something about the tax treatment of takeovers.

That struck me as moronic. I asked my elders: “They’re kidding, aren’t they?” My elders said: “Nope.”

Today I find Eugene Fama saying something else that strikes me as equally moronic:

Is Sally taking Lucy for a walk, or is Lucy taking Sally for a walk?… The Fed isn’t all powerful. Obviously, they couldn’t set interest rates at 10% and leave them there forever, any more than Sally could make Lucy go for a walk if she really didn’t want to. So who’s really in charge?… 83% of the movements in the Fed’s target rate just follow other short-term rates. There are a lot of forces affecting interest rates, and the Fed is just one small part…. And remember, this isn’t the interest on one loan–the Fed claims to control all the interest rates in the economy…

We did this experiment of seeing who was taking whom for a walk–or, rather, the German Reichsbank did it.

The Reichsbank did it back in the 1910s. It set its discount rate at 5%/year nominal. It left it there. It had no problem doing so. There was none of this “the Fed can’t make the market go for a walk if it really didn’t want to…” BS.

Of course, the Reichsbank wished, after the fact, that it had not done so.

By 1922 its policy of fixing the discount rate at 5%/year nominal had created one hell of an inflationary mess:

Reichsbank discount rate 1920s Google Search

Eugene Fama: Who’s Really in Charge?:

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October 12, 2015


Brad DeLong
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