Forest Fires

You can’t do Monte Carlo simulations on history because you don’t know the laws of evolution, so anything anyone says is simply unsubstantiated theory.

Nevertheless, here’s mine. The S&P 500 has now fallen from 1580 to the high 600s, down 57% and counting, despite intervention and cheerleading. If, instead, we’d let the market have its way with companies it didn’t like, more than a year ago, without government bailouts or interference or attempts to restore an unsustainable status quo, I am skeptical that we’d be much worse off now.

We would perhaps have had a fierce forest fire and now be looking at fresh growth on the forest floor. Instead, the flames keep finding fresh fuel.


Originally published at Wilmott.com and reproduced here with the author’s permission.

2 Responses to "Forest Fires"

  1. Guest   March 10, 2009 at 3:03 pm

    Are you saying the government should not bail out banks? Perhaps you should leave Roubini and join Peter Schiff.

  2. MS   March 11, 2009 at 3:08 am

    I actually agree to a certain extend. Sure, government intervention could have upheld market confidence in ’08 had it acted with perfect foresight, saved Lehman and immediately found a solution for the ABSes. But predictably, this didn’t occur. A non-bailout would have forced the market to get things done quickly.A breakup of the failed institutions (of which most business units are perfectly sound) would have brought a clarity for investors that’s pretty much devoid now. Still nobody knows how the interbank risks are to be assessed, there is still no market.