French Caldwell

Today, Alan Greenspan was the first major figure to admit at least some culpability for this crisis.  At least one man in this mess has some honor.  In his testimony before Congress today, Alan Greenspan said: “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders.”

SEC chairman Christopher Cox also testified recently saying that credit ratings agencies gave undeserved AAA ratings to mortgage backed securities.  I especially liked the excerpts of e-mails and IM exchanges from analysts at the ratings firms that Chairman Henry Waxman’s Committee on Oversight and Government Reform produced.  I’m not going to repeat them here, but this article on Fox Business has some good ones.

So, why am I just regurgitating this news — mainly because there is no reason that the regulators and central bankers could not see this coming.  Gartner’s own Ken McGee published a good note in early 2001 called “ Mr. President, Ask for Real-Time Economic Analysis.“  Here’s a long excerpt from Ken’s note:

We can glimpse the potential value of real-time data analysis to global economic policy if we look at an economic disaster that eluded forecasters and policy makers: the 1997 Asian financial crisis. If we had the capability to detect the following chain of events more quickly, perhaps we could have reduced or avoided the enormous economic and political damage of the crisis:

• The reduction in private capital inflows into the region
• Increased foreign investments to domestic banks and corporate borrowers in the region, followed by a withdrawal of foreign investments when signs of trouble began
• A sharp decline in currency values and exchange rates
• Higher interest rates to offset the outflow of foreign investments
• Failed attempts by Asian central banks to stop rapidly falling exchange rates.

As the interdependence of our connected economy grows, the national interest demands that the federal government appropriate funds to build a new economic monitoring infrastructure. This infrastructure would capture, analyze and report critical domestic economic indicators on which the government bases fiscal and monetary policies — in as close to real time as possible. In addition, the government should fund initiatives to identify potentially destabilizing effects abroad that could undermine U.S. economic well-being.

What do you think?  Should policy makers and regulators have been able to get past political expediency and prevent this crisis?  Would better analytics and risk measures have been helpful?  Or would we have just ignored the warnings even with better predictors and measurements?