Analyzing the Analyzers

One of the more fascinating things about a crisis and its resolution is the post-mortems: The after-the-fact analyses that some folks do to explain what occurred.

These analyses are fascinating for what they reveal about the beliefs, methodologies, biases and cognitive failures of the many crisis watchers.

Human fallibility being what it is, we can divide this universe into 3 buckets of observers:

1) Those who get it mostly wrong.

2) Those who can correctly describe a small slice of what happened;

3) Those who understand the full boom and bust — how all the moving parts came together to cause the crisis.

The first bucket is the easiest to both understand and dismiss: It contains the ideologues and market worshipers, as well as the perma-bulls — none of whom have much in the way of methodology. They are believers who know that in the long run stocks (and houses for that matter) will come back, whether we are dead or not. For the most part, they missed all of the warning signs of recession, credit crisis and boom and bust of the housing collapse. They called it a “mental recession.”

This motley crew says it was all the fault of too much regulation, no it was CRA/Fannie Mae — Why do we even have a Fed? That was the cause — No its mortgage interest deduction — no its all Barney Frank’s fault, no wait, it was caused by too much minority home buying — no, it goes back to FDR — No, Its all the Government’s fault, there should be no State — All hail John Galt, we should be free without any government intervention whatsoever — Bababooey!

As you might imagine, their ravings throw off a lot more heat than light. They provide no insight into the what actually occurred — But hey, its great theater.

The second group is a lot more instructive and interesting. They accurately detail a tiny aspect of the crisis in great detail. These observers are like the 6 blind men describing an elephant: Partly correct, yet mostly incomplete. Their individual descriptions accurately describes various body parts (Trunk, tusk, ear, etc.) but they never describe the creature in its entirety.

This group includes those who blame the entire debacle on derivatives or the formula for Value at Risk. The original concept of securitization. Wildly misaligned compensation incentives. They blame the ratings agencies and/or the the deification of markets via EMH, or the massive increase in use of credit since the 1950s. Some blame allowing Lehman to fail as the cause; others blame bailing out Bear Stearns, yet still others say it was all Goldman Sach’s fault. Fill in your own blank.

In the hunt for the unified field theory of the economic crisis, these observers may accurately describe a single aspect of what happened, but they fail to capture the fullness of what caused the debacle. They miss the crisis’ gestalt.

Lastly, we have the Big Picture observers (no pun intended). These folks try to put all of the moving pieces together. They look for proximate causes, not abstract theories. They try to see how one event led to the next event and the next and so on down the entire cascading collapse. These folks understand complexity, causation, risk, statistics and cycles. They are pragmatic, not ideological.

They are unfortunately, all too rare.

I only can wish that more of the people trying to repair what happened, and prevent the next crisis, were in the third group . . .