Fama: No Internet bubble, no housing bubble

Paul Krugman digs up a 2007 interview with University of Chicago economist Eugene Fama, which says pretty much all you need to know about Chicago school macroeconomics:

Well, economists are arrogant people. And because they can’t explain something, it becomes irrational. 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.
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Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.

Much as I disagree with Krugman's views on current financial markets (which are at best underinformed, and well outside his area(s) of expertise), I completely, 100% agree with his assessment of Chicago school macroeconomics. This is literally the kind of analysis -- '29 crash was too small, '87 crash was too big, therefore markets are efficient! -- that informs much of modern Chicago school macro.

People tend to assume that famous economists like Fama must have complex, rigorous arguments to back up their views. But in reality, most of them have simply forgotten basic lessons of macro. Milton Friedman had the intellectual honesty (and capacity) to debate New Keynesians on the merits, and while I usually didn't agree with him, he was a force to be reckoned with. Most modern Chicago schoolers (there are exceptions of course, but not many) simply assume that markets are good and government is bad, even though they can't articulate why. I'm glad Krugman and Brad DeLong are finally telling it like it is.