Monday, April 05, 2010
Wrong forecast gives a false sense of security. You can safely argue that none of the Lehman, AIG, and Bear Stern modelers forecasted the coming tsunami in 2007. Not even the Fed foresees the damage a nationally depreciating housing price can do to the world economy. The fact that world governments resort to fire fighting by printing money - 1.4 trillion in the US alone - speaks volumes to the failure of forecasting. That is why Mr King is advocating improving robustness of the infrastructure, and funding the fire fighting capacity. The true lesson from this financial crisis is that financial modelers are very ignorant about economic history, and determined to stay that way, while layman put too much trust in these "quants". Don't be fooled by people claiming to have an equation that can forecast a society's behavior. Issac Newton said he can not, and so you should be skeptical. Your skepticism will make the financial market healthier - you become part of the robust system.