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Beyond Mechanical Markets by Michael D. Goldberg, Roman Frydman

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6

The Fable of Price Swings as Bubbles

THE GLOBAL FINANCIAL CRISIS that began in 2007 has led many observers to question the relevance of contemporary macroeconomic and finance theory for understanding outcomes and guiding policy. Many economists have also recognized that their portrayals of individual behavior and markets are deficient. But they have remained steadfast in their belief that they should continue to search for better, and even more complete, fully predetermined accounts of outcomes.1

To be sure, swings in housing, equity, and other markets, which are often blamed for the crisis, substantially eroded faith in the ability of financial markets populated by rational participants to allocate society's capital nearly perfectly. Nevertheless, ...

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