Don’t Hug the Bean Counters

March 17th, 2009   •   no comments   
Ph.D.’s Models Didn’t Predict Collapse

The U.S. Treasury couldn’t keep up with the complexity of the financial instruments that Wall Street was creating. As a result, they relied on the Street’s risk analysis folks to tell them what the real risks were. (This is akin to having the fox guard the hen house.)

The Ph.D.’s — theoretical physicists, physical chemists, etc. — calculated risks based on statistics from earlier models. Models created long before sub-prime mortgages were being written in a fast-appreciating real estate market fueled by cheap money from Asia.

The Treasury Department couldn’t predict the collapse because they had no roadsigns indicated there were dangers ahead — ROAD OUT AHEAD! DANGER! FALLING ROCKS! Any one of those might have worked. But, they weren’t driving and they almost weren’t a passenger: they had no idea there was even a cliff on that road.

Recent information suggests that the money we (the U.S. government, that is) have been giving to A.I.G., the insurance giant, as part of the TARP bailout, has been used to pay off “mortgage insurance policies” to French, Swiss and German banks. So what. Yeah, not important.

What is important is the reality that the folks that do the numbers — run the numbers, create the pro forma’s, generate the spreadsheets — have only been helpful to businesses as analysts who are able to look backwards. Rarely, have many of them been prescient enough to eek out a view of the future that was all that helpful, or even benign.

I love my accountant; he’s a great guy and he loves his daughter. But, I’m not going to hug him; he follows the rules and, in the process, keeps me out of trouble with authorities. If I ran my life according to his views, I think my interpretation would be to stay in bed most days. Even though that wouldn’t be his intent; at least I couldn’t get taxed for staying in bed.

All of this discussion leads me to conclude that the people doing the numbers — nice folks, well intentioned folks — shouldn’t be running the business. I’ll give them hugs some other time.

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