Yet Another Chapter from the Chronicle of Doom Foretold, and Prophets Ignored

"No one could have foreseen . . ." is the familiar refrain of idiots who ignored warning signs apparent to many. Brad DeLong takes a look at the Panic of 2008, and those who could not see that train coming:

Paul Krugman comments on Dean Baker's ire:

The few, the proud, the ignored: Dean Baker is mad at Robert Rubin for suggesting that "few, if any" people saw the financial meltdown coming.

I'd say that there are two levels to this. First, a lot of people -- including Dean, me, Calculated Risk, and others -- saw that there was a huge housing bubble. It remains amazing that so many alleged experts failed to see the obvious.


Krugman and DeLong have a nice analysis, but I wonder if it's really to the point. The whole idea of a Ponzi scheme is not that nobody can see where it ends, it's that some are getting rich before it does.

We are in such a state because:

Quantitatively- and analytically-sophisticated Wall Street teams greatly overestimated their capability to assess and manage risk.
Institutions greatly overestimated the extent to which the QaASWSTs were assessing risk as opposed to simply writing out-of-the-money puts they could not value and claiming they had lots of alpha.
Investors greatly overestimated the extent to which institutions understood what their teams were doing.

Again, did they really fail to correctly assess risk, or did they just ride the cash train while it was going their direction?

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