Holman Jenkins has an essay on the financial crisis which has prompted some comment among blogs. Felix Salmon criticizes it here and here .
My take is the essay is peculiar in that it seems to boil down to "s**t happens". This is true but it does not mean what happened was just bad luck and nobody's fault. It is not the job of Wall Street to simply assume risk, it is Wall Street's job to price risk and only assume risk when adequately compensated. It is now clear that Wall Street failed (through some combination of greed and stupidity) to assess risk competently. This needs to be fixed. Jenkins does not acknowledge this.
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How does Wall Street estimate the risk of a phenomena that is brand new? In this case, what was brand new was that the bond market priced in a recession early, mid 2005. But the oil spike kept on rising, and after a pause, so did long term rates. The recession waited until 2007, two years too late. The Shit that Happened was the consumer, merrily chugging along with oil prices above the normal peak for an extra two years. WhoCoodaNode?
ReplyDeleteIt is nobiody's fault that a recession planned in mid 2005 did not occur, that the correction the bond market wanted did not occur. Thus catching everyone by surprise, housing sales continued forward until this new phenomena could be figured out.
We still have not completely figured out how some households could have chugged merrily on with oil at 80,90 and finally near $150/barrel. But we have a clue.