In a sense, I am turning the question posed by this conference – do efficient financial markets contribute to financial crises? – on its head by asking whether efficient financial markets mitigate financial crises. To answer the question, we need to look at the financial market situation of just over a year ago.
Following the Russian default of August 1998, public capital markets in the United States virtually seized up. For a time, not even investment-grade bond issuers could find reasonable takers. While Federal Reserve easing shortly thereafter doubtless was a factor, it is not credible that this move fully explained the dramatic restoration of most, though not all, markets in a matter of weeks.