Paradigm shift in financial-sector policymaking models: from industry-based to civil society-based EU financial services governance?

Before the Global Financial Crisis started in 2007, the financial and economic policies of several jurisdictions with ‘highly developed’ financial markets were, to a large degree, based on two economic theories, namely the Efficient Market Hypothesis and the Rational Expectations Hypothesis. The Efficient Market Hypothesis is a very influential economic idea formulated by Eugene Fama in his seminal work Random Walks in Stock Market Prices (Fama 1965). One of the postulates of the Efficient Market Hypothesis is that the prices of financial instruments reflect all the available information; hence, ‘in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value’ (Fama 1965, p. 56). As to the Rational Expectations Hypothesis, it was first proposed by J. F. Muth in his paper Rational Expectations and the Theory of Price Movements (Muth 1961) where he claimed that economic outcomes reflect, to some extent, the expectations of economic agents (Muth 1961, p. 316). The Rational Expectations Hypothesis constitutes a pillar of the Efficient Market Hypothesis; for instance, according to it, the price of financial instruments partially depends on what the buyers and sellers of those instruments expect it to be in the future (Sargent 2008). These two theories were at the core of the so-called equilibrium paradigm, according to which financial markets tend towards a state of equilibrium (Soros 2008, p. vii).