On Sunday, the NYT published an “Economic View” piece from Harvard professor Greg Mankiw. He’s got a couple of quotes that resonate strongly:
One thing we cannot do very well is forecast the economy. The recent crisis and recession caught most economists flat-footed. This is nothing new. We have never been good at foretelling the future, but when the news is favorable, others forgive our lack of prescience.
On why Fannie and Freddie went down:
Why was nothing done? Many members of Congress were worried less about financial fragility than about expanding access to homeownership. Moreover, lobbyists from these companies assured Congress that there was no real problem, while the sheer complexity of these institutions made it hard for legislators to appreciate the enormity of the risks.
Finally, on what we should do to prepare ourselves for the future:
We should plan for future financial crises, to occur at some unknown date for some unknown reason, and arm ourselves with better tools to clean up the mess.
Sounds easy, huh? In the article, he also proposes a radical, commonsense framework for larger financial institutions; you could classify his proposal as a type of “crisis insurance” funded by the private sector. Check out the article to read the specifics.
This is another argument for using relative strength. Forecasting doesn’t work-not for economies or financial crises. Your best bet is to measure and adapt systematically.
