This week’s The Economist has an excellent special report: The Gods Strike Back.
The title comes from Peter Bernstein’s Against the Gods:
“The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.”
The report contains these stories:
- Taming financial risk
- Number-crunchers crunched
- Cinderella’s Moment: The role of the risk manager
- Banks and risk management
- When the River Runs Dry: Evaporating liquidity
- Fingers in the Dike: The future of financial regulation
- Blocking out the Sirens’ Song: Risk after the crisis
For me, when looking for blame, I tend to focus on the rating agencies. As the report points out, the raters were paid by the the issuers not the purchasers of the securities. That results in a misalignment of interests. Of course, they may have just gotten wrong.
Looking at the chart below you have to be impressed by how spectacularly wrong they were:
Hopefully, we will learn some lessons from the financial crisis. We should have learned by now that the next crisis will be caused by something different so we need to be able to recognize and deal with the unexpected.