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Irving Fisher

In October 1929, Professor Irving Fisher of Yale University, a great guru of the markets, earned immortality with the pronouncement:
"stock prices have reached what looks like a permanently high plateau."

China in the Debt-Deflation Trap
In 1933, Irving Fisher was the first to identify the dangers of over-indebtedness and deflation
Andrew Sheng and Xiao Geng
Project Syndicate 24 September 2015

Anders Borg, SvD 21 januari 2014:
- Jag tror att vi ska räkna med stillastående priser på bostäder under tio år framöver.

While gentle deflation can be benign in low-debt economies, it plays havoc with the debt dynamics of leveraged economies,
an effect described by US economist Irving Fisher in his 1933 classic “Debt-deflation Theory of Great Depressions”.

Ambrose Evans-Pritchard, 7 Jan 2014

Could the West simply start saving and paying back its debt?
If too many debtors pursued this path at the same time, the ensuing reduction in consumption would lead to lower growth, higher unemployment, and correspondingly less income,
making it more difficult for other debtors to save and pay back.
This phenomenon, described by Irving Fisher in 1933 in The Debt-Deflation Theory of Great Depressions, can result in a deep and long recession,
combined with falling prices (deflation).
David Rhodes and Daniel Stelter, via John Mauldin, January 2012

Irving Fisher, The Debt-Deflation Theory of Great Depressions

The Myth Of the Rational Market
Stocks fell off what Irving Fisher had called a "permanently high plateau" in October 1929
and didn't return until that level until 1954.
Justin Fox, Time, June 22, 2009

Based on Fox's book The Myth of the Rational Market, published this month by HarperBusiness

In the 1990s and 2000s, in fact, this myth of the rational market was embraced with a fervor that even Irving Fisher never mustered. Financial markets knew best, the thinking went. They spread risk. They gathered and dispersed information. They regulated global economic affairs with a swiftness and decisiveness that governments couldn't match. And then, as debt markets began to freeze up in 2007, suddenly markets didn't do any of these things. "The whole intellectual edifice collapsed in the summer of last year,"
former Fed chairman Alan Greenspan said at a congressional hearing in October.

Milton Friedman--and his libertarian ideological bent was certainly a factor. Friedman never believed markets were perfectly rational, but he thought they were more rational than governments. Friedman saw the Depression as the product of a Fed screwup--not a market disaster--and convinced himself and other economists (without much evidence) that speculators tended to stabilize markets rather than unbalance them.

Mutual-fund managers failed as a group to outsmart the market, and studies showed that new information was quickly incorporated into prices. Eugene Fama, a young professor at Chicago's business school, tied all this together in 1969 into what he dubbed the efficient-market hypothesis. "A market in which prices always 'fully reflect' available information is called 'efficient,'" he wrote--and the evidence that such conditions prevailed in the U.S. stock market was "extensive, and (somewhat uniquely in economics) contradictory evidence is sparse."

It didn't take long for a new generation of scholars, many with roots at Samuelson's MIT, to start pointing out the problems. Samuelson protégé Joseph Stiglitz showed that a perfectly efficient market was impossible, because in such a market, nobody would have any incentive to gather the information needed to make markets efficient. Another Samuelson student, Robert Shiller, documented that stock prices jumped around a lot more than corporate fundamentals did. Samuelson's nephew Lawrence Summers demonstrated that it was impossible (without a thousand years of data) to tell a rationally random market from an irrational one.

The 1987 stock-market crash gave Shiller and Summers all the ammunition they needed.

But the strong performance of the U.S. stock market and economy tended to silence doubts about the wisdom of the market both on campus and where it really mattered--in Washington and on Wall Street. Shiller warned repeatedly of irrational exuberance in stocks in the late 1990s and in housing in the early 2000s. He was largely ignored both times--until he turned out to be right. Unwillingness to countenance the possibility that market prices might be wildly wrong defined the behavior of regulators, corporate executives and most Wall Streeters during both the tech-stock and real estate bubbles.

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Different this time?

Even as other observers fretted that a market bubble was about to burst,
Irving Fisher confidently predicted that stocks had reached “a permanently high plateau.”
Too bad it was October 1929.
Matthew McClearn, April 14, 2008 issue of Canadian Business magazine

Fisher was one of the leading economists of his generation, a professor at Yale University and one of the most quotable prognosticators on Wall Street. He wasn’t just selling this Kool-Aid — he drank deeply, investing heavily in the stock market, and had assembled a fortune of $10 million from virtually nothing.
The subsequent crash not only exposed his folly; it wiped out his net worth and left him in hock $1 million to his sister-in-law.

As the economy collapsed around him, Fisher continued to insist for the next two years that an imminent recovery of stock prices was just around the corner.
Fisher eventually concluded that existing economic theory couldn’t explain the pervasive misery and in 1933, he published a groundbreaking new theory
- The Debt-Deflation Theory of Great Depressions

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Om det finansiella systemet hade destabiliserats hade ekonomin /1992/ kunnat hamna i vad Irving Fisher kallade för "skulddeflation".
Krisförloppet kunde sålunda ha blivit mycket allvarligt, som under depressionen och bankkrisen i början av 1920-talet.
Urban Bäckström i Ekonomisk Debatt nr 1/98

In October 1929, Professor Irving Fisher of Yale University, a great guru of the markets, earned immortality with the pronouncement: "stock prices have reached what looks like a permanently high plateau."
BBC 27/10 2004

In his debt-deflation theory, the US economist Irving Fisher explained a truly toxic mechanism that has some potential implications for our own post-subprime world. If a debt crisis coincides with severe deflation, the value of outstanding debt rises even as debt gets repaid. While all this is happening, central banks are constrained in their ability to stimulate the economy by the zero nominal interest rate bind.
Wolfgang Munchau, FT February 11 2008