Saturday, October 25, 2008

Mystery of the perfect storm

Michael Boskin describes the "perfect storm".

The current situation was created by a perfect storm of mutually reinforcing trends and policy mistakes: loose monetary policy (years of negative real interest rates in a growing economy); socially engineered housing policy (the Community Reinvestment Act, Fannie Mae and Freddie Mac, HUD's no-money-down mortgages); the rapid growth of leverage, opaque and technically deficient derivatives, and the shadow banking system; fragmented regulation, lax diligence, poor governance, fraud; and an oil price shock. The result: a housing bubble bursting into recession.

John Quigley suggests ways to better align inventives in mortgage lending. He also notes that how we got to where we are makes quite a mystery.

How, you may wonder, could contracts with
such poor incentives have evolved? To some
extent, that remains a mystery.

Perfect storms and mysteries command the attention of smart people. So fight the lows brought by financial losses and politicians' posturing with the high that there are huge and auspicious puzzles before us. How do you unscramble the mystery of a perfect storm?