"Needed: A Clearer Crystal Ball"
I've made this point many times as well, we need a better early warning system, and that requires better ways of measuring and assessing risk:
Needed: A Clearer Crystal Ball, by Robert Shiller, Commentary, NY Times: There were relatively few persuasive warnings during the 1920s that the Great Depression was on its way, and few argued convincingly during the last decade that the most recent economic crisis was near. ...
In fact, some people view the recent crisis as just another “black swan event”... But the theory of outlier events doesn’t actually say that they cannot eventually be predicted. Many of them can be, if the right questions are asked and we use new and better data. Hurricanes, for example, were once black-swan events. Now we can forecast their likely formation and path pretty well, enough to significantly reduce the loss of life.
Such predictions are a crucial challenge in economics, too, and they are why data collection ... can be very revealing. The Dodd-Frank Act of 2010 created a Financial Stability Oversight Council with a research arm, the Office of Financial Research... Perhaps these new organizations will improve our knowledge, mirroring the progress we have seen with hurricanes. ...
The Depression of the 1930s was blamed on a lack of knowledge, too... The government’s National Income and Product Accounts data began as a reaction to the Depression. ... The Federal Reserve started work on its Flow of Funds Accounts in the Depression as well. ...
Some financial economists have begun to suggest the kinds of measurements of leverage and liquidity that should be collected. We need another measurement revolution like that of G.D.P. or flow-of-funds accounting. ... The past suggests that this project will take many years to complete. But it will be worth the effort.
Posted by Mark Thoma on Saturday, April 30, 2011 at 03:42 PM in Economics, Financial System, Regulation |
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