Forever Blowing Bubbles


Richard Posner on the economic crisis:

One can't expect to receive praise, or even to avoid criticism, for preventing a bad thing from happening unless people are sure the bad thing would have occurred had it not been for the preventive effort. If something unlikely to happen doesn't happen (and, by definition of "unlikely," it usually will not happen), no one is impressed. But people are impressed unfavorably by the costs incurred in having prevented the thing that probably wouldn't have happened anyway. And virtually all warnings are premature, because the date of a warned-against event is likely to be irreducibly uncertain.

No one not even Roubini could predict the day on which the housing bubble would burst, or indeed the week, month, or year. Furthermore, it is impossible to perform a cogent cost-benefit analysis of measures to prevent a contingency from materializing if the probability that it will materialize is unknown. The cost of a disaster has to be discounted (multiplied) by the probability that it will occur in order to decide how much money should be devoted to reducing that probability. No one could have calculated the probability of a financial crisis such as we are experiencing.