Greenspan - We will never have a perfect model of risk

ft.com/cms/s/0/d386202c-f3c3-11dc-b6bc-0000779fd2ac.html?nclick_check=1

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

“the mathematically elegant economic forecasting models that once again have been unable to anticipate a financial crisis or the onset of recession.”

How about using a bit of common sense instead Alan? How are these poor people with rotten credit records getting huge sums of money to bid up prices? Will they be able to keep up the payments … mathematically elegant economic forecasting models my arse.

What a load of crap - the models may have looked elegant, but they had flaws you could drive a truck through.

The model for CDOs was wonderful, unless of course there was correlated cause for increased failure in the various RMBSs of which it was composed - and guess an economic slowdown or interest rate change does?

The model for CDSs is wonderful, except that the leverage is so high that if one major CDS trading entity goes pop, the market impact of the forced sales will cripple the rest of them, leading to a cascade of failures.

And as for SIVs, those things are so toxic the banks had to pretend they didn’t exist.

Speaking of Mr. Greenspan, he gets a pasting in the Business lead of the indo today in a particularly gloomy leader:
independent.ie/business/sorc … 24800.html

(edited and emphasis added)

Given its recient history, the Fed believes it can kill inflation at will and so is content to jolt the US economy through each peak and trough by pumping liquidity into the system. The ECB has no such belief. The ECB believes that inflation is the financial equivilent of “the destroyer of worlds”.

Both central banks take a different approach to risk … they may even define risk differently. The Fed is terrified of recession/depression. The ECB fears inflation.

Blue Horseshoe

But apart from monetary policy, aren’t the CBs also supposed to ensure financial stability and prevent crisises? If so, then Greenspan failed and it was probably too late by the time Bernanke started - however he tries to fix it is a another matter. I reckon Greenspan couldn’t see it from his ivory tower and started to believe the systems bullshit. I’d say his legacy matters a great deal to him (more than the US/global economy) and he wouldn’t have wanted this.