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Sunday, March 1, 2009

World Turned Upside Down

Today’s global economic crisis has left many people—even the best informed—scratching their heads. About six months ago some said it was part of a ‘necessary’ recession. Then, once the financial crisis began to spread quickly into the overall economy, first in the US, then to Europe and Asia, it became clear that this was no ordinary recession. No longer are the experts speaking of a crisis of liquidity. It now seems to be a classic crisis of solvency. How many more banks will fail? How many more governments will fall?

Those with capital flock to imaginary safe havens. The rest of us flock to gurus. Krugman and Roubini have replaced Buffett, Gates, Gerstner and Welch. Rubin has disappeared from public view; Greenspan is coming to resemble Robert McNamara with his stream of feeble defenses and half-hearted confessions; Summers has done his best to jump to the other side of the fence. And where is Jude Wanniski when we need him most? Alas, he passed away three years ago.

Here is a thought: risk specialists tell us that relative safety is found in diversification. But this is proving to be misguided in this instance—assets we thought were well diversified turn out to all be linked to one another, and have collapsed accordingly, like proverbial dominoes. It is similar, in a way, to the long cherished doctrine of redundancy in nuclear defense. The Soviets buried their best weapons under miles of concrete bunkers. NATO spread its best weapons all over the place in the assumption that a second, or even third, strike would be possible no matter what, and that a nuclear war could therefore be won.

Whether they really meant it is another question, but it sure made the Soviets dig even deeper and pour even more concrete. Redundancy must have paid off. But since then ‘threat analysis’ has assumed the opposite, at least so far as the other guys are concerned—the more widespread a threat is, the greater its potential to inflict harm.

Are risks going the way of threats? Is this what the 1990s, culminating in 9/11 and now economic meltdown, have left behind?

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