Too soon old, too late wise!

Speaking of numbers, it’s amazing how anytime a number is thrown into an excel sheet or onto a powerpoint it automatically assumes some sort of authority. Many people tend to forget another MBA rule, GIGO – garbage in, garbage out.

I think there is another MBA rule that was forgotten at our peril. All value is based on future cash flow. So all these quants that came up with amazingly complex mortgage backed securities didn’t seem to notice the very simple fact that home prices had no relation to buyer’s incomes or potential rental revenue.

Numbers have the appearance of certitude and precision, and people like this b/c it makes for nice charts on powerpoints.

I think also Americans consume too much is a bit simplisitc. We’re not collectively retarded. But so long as wealth continued to grow as it did, people continued to consume more sure that a bonus check, refi, or something else would allow them out of the hole. We’re all tightening now, we the same basic people.

Unlike Taleb, I’m not entirely dismissive of Gaussian mathematics as a lens through which you can see the world and predict the future. I certainly have no better, rational, internally consistent, and theoretically justifiable suggestion for how people should make decisions under uncertainty.

That said, risk managers surely ought not to rely so much on quantitative models, and they ought to employ a qualitative “common sense” test. With the benefit of hindsight, the qualitative flaws in the quantitative models are quite apparent. Why wasnt this forseeable?

This is the long-winded way of saying what you avoided saying: Americans consume too much.

I remain convinced that the largest root cause of this recession is the trade imbalance with Asia, fueled significantly by China’s undervalued fiat currency, and the asset bubble that resulted from their reinvestment of cash surpluses back into the West.