Paul Krugman concludes a review of Justin Fox’s excellent The Myth of the Rational Market on a pessimistic note:
Indeed, I came away from reading these books wondering if their shared underlying premise — that the current crisis will put an end to Panglossian views of financial markets — is right. Fox points out that academic belief in the perfection of financial markets survived the 1987 stock market crash and the bursting of the Internet bubble. Why should the reaction to the latest catastrophe be any different? In fact, what I hear from my finance professor friends is that there’s a lot less soul-searching under way than you might expect. And Wall Street’s appetite for complex strategies that sound clever — and can be sold to credulous investors — survived L.T.C.M.’s debacle; why can’t it survive this crisis, too?
My guess is that the myth of the rational market — a myth that is beautiful, comforting and, above all, lucrative — isn’t going away anytime soon.
That seems about right to me. Since the crisis, people who always thought strong claims about efficient financial markets were wrong have been feeling vindicated. But I don’t see much evidence of anyone having changed their minds. Nor have the big banks lost any clout on the Hill. Nothing really seems changed. To an extent, I suppose this is a consequence of the fact that Bernanke and Geithner succeeded in avoiding the total collapse of the world economy. Maybe we’re doomed to an escalating series of crashes—’87 stock crash, LTCM collapse, tech bubble, Panic of 2008—until something happens that the lenders of last resort can’t save us.