Greenspan Concedes to ‘Flaw’ in His Market Ideology — Bloomberg (2^nd Term)

’”If we are right 60 per­cent of the time in fore­casting, we are doing excep­tion­ally well; that means we are wrong 40 per­cent of the time,” Greenspan said. “Forecasting never gets to the point where it is 100 per­cent accurate.“‘

Yes, that fol­lows. And when the con­se­quences of bad out­comes are cat­a­strophic and pre­dic­tion of good out­comes can’t be cer­tain, you have to have poli­cies which are robust to failure. What Greenspan seems to have been sug­gesting, and what he still seems to be defending, is that when pre­dic­tion cannot be 100%, it is accept­able or even inevitable to forge ahead as if the out­come was sure to be uni­formly positive.

‘Today, the former Fed chairman asked: “What went wrong with global eco­nomic poli­cies that had worked so effec­tively for nearly four decades?”

Greenspan reit­er­ated his “shocked dis­be­lief” that finan­cial com­pa­nies failed to exe­cute suf­fi­cient “sur­veil­lance” on their trading coun­ter­par­ties to pre­vent surging losses.’

So how many cat­a­strophic market fail­ures do we have to have before we get past shocked dis­be­lief when there’s another? Sure, each one is dif­ferent in spe­cific char­acter than the last, but the insis­tence that this time we’ve got it all fig­ured out is prac­ti­cally childish when repeated ad infinitum. Marketeers seem capable of con­vincing them­selves that, because they are per­son­ally familiar with the mech­a­nisms at play at the level of indi­vid­uals, they can there­fore know what behav­iour will emerge at the level of the system. It’s not that neolib­eral market the­o­rists don’t believe in emer­gence, by con­trast they are devoted to the ele­gant effi­cien­cies that they see when mar­kets aggre­gate infor­ma­tion and action. They just don’t seem to want to believe that com­plex sys­tems (including the ultra-​​complex sys­tems Wall St. financiers are capable of cooking up) are capable of neg­a­tive out­comes too.

It comes back to John Kenneth Galbraith’s posi­tion that market col­lapses don’t happen because of unpre­dictable shocks from some­where out­side of the lines that econ­o­mists draw around “the economy”, they happen because of the most fun­da­mental rules of cap­i­talist economies. And they will again, par­tic­u­larly if we don’t exer­cise cau­tious oversight.

update: See also this inter­esting and con­vincing chunk of quotes from the same testimony:

Greenspan: Bad data hurt Wall Street com­puter models — NYT

‘Business deci­sions by finan­cial ser­vices firms were based on “the best insights of math­e­mati­cians and finance experts, sup­ported by major advances in com­puter and com­mu­ni­ca­tions tech­nology,” Greenspan told the com­mittee. “The whole intel­lec­tual edi­fice, how­ever, col­lapsed in the summer of last year because the data inputted into the risk man­age­ment models gen­er­ally cov­ered only the past two decades a period of euphoria.”

He added that if the risk models also had been built to include “his­toric periods of stress, cap­ital require­ments would have been much higher and the finan­cial world would be in far better shape today, in my judgment.“‘

We live and learn. Especially about using models to make serious decisions.