My Dear Friends, People of Denial. You amaze me.
Don’t you ever wonder why your Explanations and Explications, your Wisdom of Experience, your Expert Authority are so cheap, useless, and empty? These days.
Do you ever suspect that the world financial meltdown might reflect something more than ‘greedy CEO’ contracts encouraging “risk-taking culture”? (Wasn’t ‘greed’ meant to go with being a corporate leader, anyway? Isn’t risk-taking culture the essence of a sophisticated financial sector? Isn’t every word about CEO compensations pure populism?)
Do you really think that the financial engineering of super-highly leveraged derivatives could bring down the entire global economy even if it were under-regulated? Wouldn’t existing policy tools be able to deal with the intermingled mess if something else was not looming in there? (Something large, dark, and unknown...) Wouldn’t you need something more to explain why the over-packaged non-transparent risk bundles have not been sorted out in the last 18 months, since we have known for sure that they are around?
Isn’t it that our assessment of ‘risk’ comes from a particular framework? Notably the same one where Your Infinite Wisdom originates? Isn’t it that pricing risk essentially relies on a particular understanding of the entire system? Isn’t the problem really with our current definition of ‘the entire system’?
Aren’t all of these excuses really denials about the need to go and discover that large, dark, unknown Something?.
Could it be that our perception of what the ‘system’ is, and what we imagine about the ‘way-it-works’ are wrong. In other words. That we have been modelling a different ‘economy’ to the one that is really out there, and we have been mistaken about how it moves, reacts, behaves? If so, we would be screwed, wouldn’t we? We would have incorrect ideas about what the risks really were, and we would price them incorrectly. And when the inevitable troubles came, it would be impossible to pick an effective instrument to sort them out.
Huge piles of incorrectly priced risk bundles and inadequate policy tools? That’s what that would mean.
We are screwed.
It is as if we were vets, and an animal was brought in, in urgency. We rush it to the operating theatre, and get down to saving it. Only gradually occurs to us that we have got the species wrong. “Professor, shall we opt for the sedatives after all? I am not sure if bunnies should have teeth of this size.”