My understanding of economics is pretty basic. I can understand, and try to follow, the financial principles espoused by Mr. Micawber in Dickens’ David Copperfield:
"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
I really think that that is all one needs to know, anything more, it seems to me, gets closer to religion and blind faith. So I can’t say that I’m much surprised by the current crisis in the financial markets.
In an attempt to understand the causes, I’ve been reading two analyses of the events. The first is an article in Edge written by Nassim Nicholas Taleb called The Fourth Quadrant. I will forgive him the air of "I told you so" that permeates the article, he’s somewhat justified in having it. After all, it was he who wrote back in 2006:
The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events "unlikely."
However, his analysis goes into dizzying detail about statistical theory and how people misinterpret statistics and probabilities. I’ll probably need to read the article several times before I can come closer to understanding what he is saying. But even after all that, I can’t help feeling that he’s shining the light of reason in the wrong place. That was brought home to me when I read John Carter Wood’s article over at Obscene Desserts. Like me, John finds the workings of high finance rather mysterious. He quotes from an article in the New York Times:
The mortgages, with an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers’ incomes or savings.
And then, without the benefit of graphs or statistics, John gets to the root of the matter:
Let’s just pause here for a brief moment. Just for a measly few seconds.
Please just consider that last sentence, the one in which it is pointed out that lenders gave people mortgages worth an average of nearly a half-million dollars without even checking how much they earned or how much money they had?
Is this for real?
Because if it is, I can only say: What–please pardon my French (you know, I’ve been spending some time there)–the fuck?!
It seems to me to be all too easy to label the shenanigans on Wall Street and in other financial centres as “a crisis too complex for easy fixes”. John’s put his finger on it, the world’s economy is seemingly run by a bunch of greedy wankers. Micawber’s principles should never have been forgotten.