Sir, John Authers’ assertion that “markets remain a better way of allocating capital than any other” is surely weakened given that, as he admits himself, “it is far from clear that the investment industry any longer has the skills needed to help the markets in the process of price discovery”. (“ Two cheers for the return of volatility”, February 17.) If markets are unable to price risk, how can they allocate capital coherently? The market herd has zero awareness of economic history. It gets in the way of the dopamine.
The purpose of a crisis is the allocation of losses. Misallocated capital typically goes to money heaven via the illiquidity mechanism. There is an awful lot of mispriced debt around at the moment, oblivious.
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