Economics, 3rd Edition

804  PART 15  INTERNATIONAL MACROECONOMICS

responded by lowering interest rates and flooding the 

markets with liquidity?

3 

Eugene Fama, a key figure in the development of 

the theory of the efficient markets hypothesis, 

commented in an interview with the New Yorker 

(13 January 2010):

‘If a bubble means an extended period during which 

asset prices depart quite significantly from economic 

fundamentals that means that somebody must have 

made a lot of money betting on that, if you could 

identify it. It’s easy to say prices went down, it must 

have been a bubble, after the fact. I think most bubbles 

are twenty-twenty hindsight. Now after the fact you 

always find people who said before the fact that 

prices are too high. People are always saying that 

prices are too high. When they turn out to be right, 

we anoint them. When they turn out to be wrong, we 

ignore them. They are typically right and wrong about 

half the time.’

To what extent do you think that the rise in asset prices 

leading up to the financial crisis was a ‘bubble’ or that 

in the aftermath of the crisis reference to a bubble was 

just twenty-twenty hindsight?