If Only The Economy Were Allowed to Stop Failing
Greenspan Concedes to `Flaw’ in His Market Ideology — Bloomberg (2nd 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.