Ritchie still doesn\’t get the efficient markets hypothesis, does he?

On the subject of Barclays and Libor.

Third, the means the assumptions of the efficient market hypothesis that underpinned City regulation have to be swept aside for good: they’re a fantasy, as some of us have said for a rather long time.

WTF has the EMH got to do with this case? All the EMH says is that markets are efficient at processing the information about what prices should be in a market.

22 thoughts on “Ritchie still doesn\’t get the efficient markets hypothesis, does he?”

  1. This has nothing to do with the EMH and merely demonstrates that the Murph is a fool. This is about a cartel/club of banks that submit interest rate prices into a bucket, out of which they all arrive at a rate used to set a benchmark. It is not much different from the daily fix of the spot gold price in London, for instance.

    A friend of mine has made this comment:

    The problem is the derivatives market setting trillions of contracts based on LIBOR. When it was just a few loans, it wasn’t a problem, the amounts involved weren’t enough to get people excited. The solution therefore lies with ISDA, which could finally make itself useful (for the first time in its entire existence since 1985) by switching the floating rate in swaps to a market-based indicator.

  2. I wrote the first multi-currency fixed/floating swap in the London market before the ISDA even came into existence. It was a customer-driven trade and I had no place to run. It made sense to me (on the back of a fag packet) and I calculated that it was worth bunce of at least 40 basis points per annum on a five year basis. The people who had to manage it day to day thought I was mad.This, when our money book was scraping perhaps 18 basis points. A few major fuck-ups in there, I suspect. But it was not an arbitrage…

    The point is well-made, though; the LME settlement price on a daily basis is of interest to, say, Copper traders. The six month average price is perhaps of interest to scrap traders. The yearly value of Lead is of interest to the scrotes who nicked to metal from our church roof two years ago.

    LIBOR is different, as the post says. Much depends upon it…

  3. I always love journalists announcing with great pomp how some theory or other, about which they know absolutely nothing, has been ‘vindicated’ or ‘demolished’ depending upon the political point they are attempting to make.

    Journalism degrees are so easy to come by, it’s not hard to see why the profession is full of mediocrities like this clown. The sooner the print media dies, the better.

  4. Martin (#4), that would be fine if Murphy (the man Tim quotes here) was a journalist.

    But he’s a chartered accountant, claims to be an economist and apparently has a degree in economics (at least partly).

  5. “Journalism degrees are so easy to come by, it’s not hard to see why the profession is full of mediocrities like this clown”

    Would that he was merely a journalist, Martin. This is the baffoon the BBC consult in breathless admiration on matters concerning taxation & the economy.

  6. I suspect you all know that EMH is being used as a byword for ‘laissez faire’ here by the MSM. To the average Joe, the system we have been assured is best is broken.

  7. EMH is not a fantasy – it is a simplification so that economics professors can develop a theory: the real world is so complex that may of their equations would be insoluble. A few of the theories are useful – MPT (“neither Modern, nor a Portfolio, nor a Theory” to quote one of my elders and betters) is a snare for the naive.
    I have been pointing out to anyone who would listen that markets are not efficient for forty years so it pains me when I have to defend EMH against pompous braggarts but EMH has nothing to do with manipulating LIBOR to affect the value of Barclay’s traders’ bets against HSBC or Morgan Stanley or …

  8. third, the means the assumptions of the efficient market hypothesis … have to be swept aside for good.

    fourth, it means that Hodgson should play a 4-2-3-1

    fifth, it means that E Miliband should not have avoided Inheritance Tax on his father’s house

    and sixth it means that all I want for Christmas is my two front teeth.

  9. EMH is supported by these LIBOR goings on. The information passed to the BBA was diddled with. The diddling has now been detailed and in short order the share price of the named offender has dropped sharply.

  10. @ Gareth
    EMH would require the share price of Barclays to have dropped on each of the days on which this morally wrong (but not illegal because no-one had passed a law to outlaw it) behaviour occurred. So, sorry, NO.
    You may fool Murphy with that, so you are welcome to try!

  11. EMH is one of those Humpty Dumpty words for Ritchie – “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

    If he hadn’t chosen to ignore his economics courses he would learn that it doesn’t mean what HE thinks it means, which is that markets are the most efficient way of doing things.

  12. John77,

    Surely the market in which the share price operates didn’t *know* what Barclays was doing until a couple of days ago.

  13. @ Gareth
    The basic version (sometimes called the “strong” version) of EMH assumes that the share price in the market reflects *all* information about a company, including “insider information”.
    In fact, a lot of people knew that banks wre misrepresenting their borrowing costs – hence the message from “senior management” that Barclays should lie about theirs in order not to seem to be viewed as less creditworthy. The info was public but not published in the newspapers, so even the “weak version” of EMH would require the share price to reflect that info. Various people broadly hinted where they couldn’t say outright lest they got hit by a libel suit that the declared LIBOR rate was wrong by expressing surprise in print that LIBOR was so close to Bank Rate when banks had become higher-risk.

  14. john77: it was published in the newspapers – I recall an article in the Wall Street Journal in April 2008.

    No one in the market is surprised to learn that Barcap was deliberately understating its borrowing costs between 2007 and 2009. But there are two new pieces of information to move the price: that Barcap were manipulating their LIBOR submissions to suit the direction of their LIBOR book, and the regulators’ decision to single out Barclays for public opprobrium.

    I see no implications for the EMH in any of this.

  15. PaulB (#16) mentioned “the regulators’ decision to single out Barclays for public opprobrium”.

    Is that perhaps because they are still pissed off with Barclays for having avoided nationalisation by taking Arab money during the banking crisis? And, from memory, using that protection to make some pretty scathing remarks about the way the regulators & Treasury handled the whole thing?

    And aren’t the US regulators still pissed off with Barclays about something years ago (I’ve forgotten what; was it trading with Cuba, or providing banking services for online gambling? can’t remember, but there was something like that).

    After all, they’re apparently now investigating other banks, so it doesn’t seem it was just Barclays.

    This looks like a way for regulators to settle a few scores.

  16. Richard – according to Robert Peston, the simple explanation is that Barclays have cooperated with the investigation and admitted their wrongdoing. Other banks have not cooperated and are still under investigation, although definitive evidence has yet to emerge. It’s not ‘singling out’ Barclays. Their competitors are likely to get their time in the spotlight later once the investigation is complete. Less conspiracy theory is required…

  17. tory boys never grow up

    “All the EMH says is that markets are efficient at processing the information about what prices should be in a market”

    The problem is that LIBOR isn’t entirely established by the market (although the theory also used to go that the London interbank market was one of the biggest and most efficient around) – and I suspect that the same can said of many commodities market. And I presume that you wouldn’t want to argue that the EMH could be applied to what used to be called the market for asset backed securities.

    Perhaps the proponents of EMH might wish to tell us which markets they consider to be markets, in which there are no cartels/price fixing so that we can then form a view as to how useful that hypothesis might actually be.

  18. John77 said: “In fact, a lot of people knew that banks wre misrepresenting their borrowing costs”

    Knew or suspected? Either way thanks for the pointers.

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