The 1% Panic, by Gordon Crovitz is an article, like all other WSJ Op-Eds, that gives insight to the minds of the cultured nattering American free market nabobs. In the midst of the current global financial recession, the West is compelled to observe, reflect and aver their stomach's tumult to the current economic crisis, in hopes of obviating the Marx-told-you-so pretext and providing a “better” understanding of what is, was, and may be in the Western free market. This is one of many op-ed columns in the period since Lehman Brothers' failure which adheres to such concerns and displays of lofty inquisition.
In the article, Crovitz touches on the financial market's problems which include the distrust in interbank lending, great investor apprehension, and moral hazards imposed by Washington. He determines that the quintessential mathematical structures of finance are more than apposite in finance, but that the introduction of incongruous "policy goals" from Washington encourage dysfunctional schematics in the market. One such component he underscores is the Value of Risk formula (VaR), which "assesses the historical variances and covariances among different securities, informing financial institutions of the risk they're taking." In order to make sure losses are covered, the formula helps companies look at the past in comparison to their present capital and decide if anything needs adjustment. Yet the only thing VaR falls short in is with that 1% event of unpredictability, inadmissible if plugged into the formula: for example the 1995 Barings rogue trader or today's entrenched, sinuous mortgage-backed securities (MBS). Crovitz warns that you must stay within bounds of financial sensibility and function, of which VaR and its like models appropriate. The complexity of global markets and financial instruments are the nature of finance, producing fragility which big government’s interference tends to tear. His conclusion, in light of this fragility is the following:
The good news for VaR and similar models is that the free market alone would not have allowed the bubble of subsidized mortgages, but the bad news is that it's far from clear that Congress has learned from the current crisis to pursue policy goals in ways that don't distort the fundamentals.(emphasis added)
My question is the following: How did the smartest people at the best banks running the most sophisticated financial models fail to forecast the collapse of mortage-related securities? And apparently, this sentiment is shared by Crovitz because I am quoting him verbatim. That question, however, was not answered in his article. But the question is important for me because there is a parallel running right along the paradox of Washington: the best and brightest, but the Iraq war was a major boondoggle? No, no. It was hardly a failure--do we not have control instead of access to Mid East energy and policy? Whether or not the American public went along was an ancillary benefit. The fact that the public did not support the war is unsurprisingly mistaken as a major failure for Washington's figureheads, conflating the integrity of the Iraq war.
Now, as of recently, there is a spate of fingers on Wall Street pointing towards Washington for the bad economy. They make the point that Washington, under Clinton and with strong but minor antecedents in Carter, gave injunctions to integrate the American Dream (a house, car, dog, a family of four--I think, right?) into VaR, creating a new avenue of wealth for the financial wizards to exploit and which at the same time provides more opportunities for the subprime folks and everyone nearby (80% of America) to attain the American Dream--hence Bill Clinton's great economy. Well, Crovitz gave a big part of the reason why mathematical formulas do not compute socialist aspirations--(bad choice of words) . . . do not compute attempts to assuage old aged adages (life is tough and unfair, that's the way things are, blah, blah, blah.) This is what Crovitz is worried about: "it's far from clear that Congress has learned from the current crisis to pursue policy goals in ways that don't distort the fundamentals." In other words, stop f*@king with the way things are and let people stay in their place. So what if they complain about working three jobs and they barely make their debts. So what if they give the old, "This is America, the richest nation in the history of the world. And why the financial dread in healthcare and mortgages and education?"
Do you guys see the paradox in the American Economy and in Washington? McCain calls us the greatest force for good, but would call tree huggers utopian. Obama says Reagan was admirable in reining the excesses of the 60's, as if there is a surfeit to dignity. Hillary says national security over human rights--so hence the Saudi monarchy's tyranny on women. Gordon Crovitz and the enormous legion of liberals who fancy themselves independents (because politics is inherently evil and corrupt you know, not like the American Economy) say the free market is it. It's the "end of history". But know nothing of history.
So from his article we learned there's a 1% chance that people will come to their senses . . . And that’s a panic?
