Former Federal Reserve Chairman Sir Alan Greenspan was full of sound bits at yesterday's congressional hearing on the present financial crisis. Unlike many who testify before congress, however, he admited some mistakes under his watch that fundamentally led to the current situation.
David Brooks praised him tonight and offered the best summary of the current finanical crisis that I've heard yet. Commenting on Sir Alan's testimony, Brooks went surgically metaphysical:
"Well, first of all, I admired him for saying that. We often are in a political culture where nobody admits a mistake, and he admitted a mistake. And the question is, why? What did he get wrong about the economy?
"And I think what he got wrong is -- Paul Solman had a guy named Nassim Taleb on the show not long ago who got it right, who picked Fannie Mae, who talked about the banking collapse.
"And the difference between the two worldviews is Greenspan relied on quantitative models of risk analysis, where Taleb is the product of behavioral economics, which talks about the psychology of perception and the perception of risks, and the biases we make in assuming the future will be basically like the past, and the way we look for evidence that confirms our prejudices.
"And if you looked at the risk analysis through the frailty of human perception, as Talib did, you can say this risk was out of control. People did not understand what was happening.
And all these bogus economic models that the quantifying people believed in just were bogus. And I think that's the two mental frameworks that allowed some people to understand what was going to happen and so many, so many experts not get it."