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Tuesday 22 Aug 2017 | 15:27 | SYDNEY
Tuesday 22 Aug 2017 | 15:27 | SYDNEY

Predicting the next meltdown

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17 April 2009 23:31

Richard Posner has written a mostly smart column (h/t Sullivan) about why so few predicted the financial crisis. But after some sound analysis of the cognitive traps that make it so difficult not only to figure out what's going on but what to do about it, Posner makes the odd suggestion that the US Government should develop a finance-market equivalent to the CIA:

Lacking authority to regulate new derivative securities such as credit-default swaps, financial regulators could not force disclosure of information that might have revealed how risky the financial system had become. A focus of reform, therefore, should be the creation of a centralized, unitary financial-intelligence apparatus in government that would have complete and continuous access to the books of all financial institutions.

I'm not qualified to comment on whether it would be a good idea for governments to demand more financial disclosure of the kind Posner recommends, though I suspect it would be a good thing. But just passing that information to a financial intelligence agency would surely do little to reduce risks.

Posner himself cites the intelligence failure of Pearl Harbor in his column, and he must be aware that there are countless other examples of where large bureaucracies have made the kinds of cognitive errors that he argues preceded the meltdown. So what makes him think this new intelligence agency would not be vulnerable to those same errors? I would much rather see discussion of the merits of greater company disclosures to the public than to leave it all to a government body.

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