Global Economic Meltdown – Don’t Blame it on Bad Data, Blame it on Common Sense
Alan Greenspan, the former chairman of US Federal Reserve yesterday on a hearing by the US House Committee on Oversight and Government blamed the current economic meltdown on bad data that was used to develop various computer models. According to him the data fed into developing various financial models were often “garbage-in, garbage-out”.
Why blame it on bad data now? If you have something called “common sense” you would have predicted this. The main cause for this economic downfall is the crash of US housing market. What was happening in the housing market for the last few years before the crash? House prices were increasing exponentially; the banks were giving loans to any tom, dick and harry who applied for a loan without seeing if he/she is capable of paying it back. Everything worked on the assumption that housing price is going to rise exponentially but if you use your “common sense’ you can easily understand that this cannot go on increasing like this. Somewhere in the future, increase has to flatten out and a market built just on the assumption that housing market will never go down, is going to crash like a bundle of cards. This is exactly what we have seen. The key here was every time in the history of US the housing prices were rising but was never rising exponentially and when something rises exponentially you can always expect a fall.
History is full of examples and we don’t even learn from history. There was a dot com boom in late nineties. Start-ups were mushrooming like anything, stock market was booming and again every other man you meet in the street either wanted to work in a dot com company or wanted to own one. The growth flattened after some point of time and lot of them lost their job and so much of their money.
Similarly another boom that is going on – it may have already started the negative journey – construction industry in
Take the case of IT industry in
It is good to “Make Hay while Sun Shines” but is better to know that Sun never shines always and a period of darkness will also come in between. You need just your common sense to understand that, you need to have a plan B to implement when the sun stops shining and the darkness is about to come in. No computer model is ever going to tell you when the sun stops shining and you need to use your plan B, but your common sense can do so.