Wednesday, November 19, 2008

Let's not build a Maginot line

Interesting post at Yglesias on how understanding the exact causes of the present crisis is not necessary vital to prevent a future problem.

The basic reason is that we can be pretty sure that no matter what we do, we don’t need to worry about this exact thing happening all over again. Investors will be extremely reluctant to get involved in the exact kinds of products that recently crashed, everyone will worry that the first sign of housing price increases is a bubble, and regulators will be keenly aware of everyone’s pet theory of what went wrong. But the crux of the matter is that though the phenomenon of financial crises repeat over time, but no individual crisis repeats itself. The trick, if you can pull it off, isn’t to prevent a repeat of the current crisis, but to prevent (or mitigate) the next crisis which is something else entirely.
The main problem was that the majority of people who were supposed to know better failed to looked critically at what became conventional wisdom. The focus should be on understanding why there was such a failure of critical thinking, not how to prevent another housing bubble.

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