you be the judge

We read in today's WSJ Opinion columns that the panic of 2008 is a crisis of trust. Nobody trusts anybody else anymore and so the financial system "froze." So far so good. I think everybody more or less agrees with that viewpoint.

Then Mr. Crovitz, the article's author goes on to make a few other, rather remarkable statements. One he asks, "How did the smartest people at the best banks running the most sophisticated financial models fail to forecast the collapse of mortgage-related securities?" Well, to be quite honest, it beats me. For more than two years now it has been painfully obvious to me, not working at any bank and not using any "sophisticated" models that housing was going to collapse. And that was not just an idea among many others. All you had to do was look around you. Bay Area housing prices in Modesto?

One can only conclude that the most sophisticated models were not all that sophisticated. Maybe Mr. Crovitz realized that and the large cap insert shows the "Value at Risk Formula, complex as it is," that is surely meant to impress us with mathematical sophistication. Unfortunately long formulas like that do not impress me. For one, they often indicate a complicated data-fitting model that is by definition only as good as the data it is meant to fit. Great equations, such as e=mc2 are simple. Understanding is by definition simple. If you can't express it simply, you probably don't understand it.

Second, the "smartest people" are often those with little sense of reality. They hail from a distant orbit. Witness the fact that many don't know how to tie their shoe-laces or button their shirts. Such smarts may play well at the large hadron collider but they tend to underwhelm when it comes to day-to-day living. Once again we are not impressed. And as for the best banks, we will leave that one as a home work assignment.

There is more however. Mr. Crovitz thinks we need to examine the failures because, "modern finance has delivered enormous benefits." What those are, apart from millions of dollars in the pockets of the perpetrators is not quite clear to me. 

Once again, Mr. Crovitz must sense there is something wrong because he goes on to list the enormous benefits of modern finance. For example, it goes "from explaining to investors why they should diversify their investments," to "the creation of mutual and index funds."

Maybe you want to read that again. The "enormous benefits" of modern finance are, 1. don't put all your eggs in one basket (I thought this was a old idea, but you learn something new everyday), and 2. the mutual and index funds.

That is not all. "Related innovations helped financial institutions speed capital to its best use, fund new businesses and accelerate global prosperity."

All hail "modern finance" and the "smartest people at the best banks" for bringing us these wonderful gifts. Let's not forget to thank Mr. Crovitz for highlighting these gems too.