Why The Economic Crisis Was Not Anticipated (by most)
Richard Posner provides regulatory, financial, and political insight to debunk popular claims of anticipating the economic crisis. I don’t agree entirely with the piece but I still think it’s worth your time.
Click Here To Read About Anticipating The Economic Crisis
Article Introduction (Richard Posner Via Chronicle.com)
Real-estate bubbles are common. The supply of “good” land is fixed in the short run, the housing stock is extremely durable and therefore does not expand rapidly when demand increases, and land and the improvements on it cannot be sold short. And the bursting of a real-estate bubble can lead to bank insolvencies — as it did in Japan in the 1990s — because most real estate has heavy indebtedness, financed by banks or other financial intermediaries, and real-estate debt is a significant fraction of all debt.
We can get help in understanding the blindness of experts to warning signs from the literature on surprise attacks. Before the Japanese attack on Pearl Harbor, there were many warnings that Japan planned to attack Western possessions in Southeast Asia, and an attack on the U.S. fleet in Hawaii, known to be within range of Japan’s large carrier fleet, was a logical measure, on Japan’s part, for protecting the eastern flank of its attack on the Dutch East Indies, Burma, and Malaya. The warnings were disregarded because of preconceptions (including the belief that Japan would not attack the United States because it was too weak to have a reasonable chance of prevailing), the cost and difficulty of taking effective defensive measures against an uncertain danger, and the absence of a mechanism for aggregating, sifting, and analyzing warning information flowing in from many sources and for pushing it up to the decision-making level of government.
Additional Article Excerpts ( Richard Posner Via Chronicle.com)
We can get help in understanding the blindness of experts to warning signs from the literature on surprise attacks. Before the Japanese attack on Pearl Harbor, there were many warnings that Japan planned to attack Western possessions in Southeast Asia, and an attack on the U.S. fleet in Hawaii, known to be within range of Japan’s large carrier fleet, was a logical measure, on Japan’s part, for protecting the eastern flank of its attack on the Dutch East Indies, Burma, and Malaya. The warnings were disregarded because of preconceptions (including the belief that Japan would not attack the United States because it was too weak to have a reasonable chance of prevailing), the cost and difficulty of taking effective defensive measures against an uncertain danger, and the absence of a mechanism for aggregating, sifting, and analyzing warning information flowing in from many sources and for pushing it up to the decision-making level of government.
And virtually all warnings are premature, because the date of a warned-against event is likely to be irreducibly uncertain. No one — not even Roubini — could predict the day on which the housing bubble would burst, or indeed the week, month, or year. Furthermore, it is impossible to perform a cogent cost-benefit analysis of measures to prevent a contingency from materializing if the probability that it will materialize is unknown. The cost of a disaster has to be discounted (multiplied) by the probability that it will occur in order to decide how much money should be devoted to reducing that probability. No one could have calculated the probability of a financial crisis such as we are experiencing.
