The Last Word
IT’S THE END OF THE WORLD AS WE KNOW IT, AGAIN. AND I FEEL FINE…
Robert Matthews on predicting the unpredictable
Ten years ago this month, an event took place in Paris which signalled the start of EOTWAWKI. No, it’s not a Maori festival; it’s something much less fun: The End Of The World As We Know It.
In August 2007, a French investment bank told some of its clients they couldn’t get access to $1.5bn of their own money. While undoubtedly bad news for those involved, it didn’t seem like a huge story for the rest of us. But what happened on that Thursday afternoon is now widely seen as the start of the Global Financial Crisis.
Over the following year, trillions of dollars of wealth evaporated, global financial institutions went bust and the world’s economy teetered on the brink. The cause was the discovery that vast financial bets had been made by banks about the health of US housing market. Bets that were complex, interconnected and, frankly, stupid.
And when they started to go wrong, the consequences went global – and changed the world forever.
Now there’s talk of EOTWAWKI coming around again. This time, it’s soaring consumer debt that’s prompting concern. From car loans to credit cards, levels of debt are soaring again.
So, is The End nigh – again? Unlikely. Sure, there are lots of pundits predicting it, but then there always are. What they’ve missed is the fact that we really did experience EOTWAWKI in 2007. Not the end of the world as in Armageddon, but literally the end of the world as we used to know it.
Back then, many experts thought it was possible to make predictions about, say, the US housing market, and make bets – and money – accordingly. Some even thought they could tell when the economy was in trouble. Not any more. Now, financial regulators and central banks are far more sceptical about economic forecasts and the reliability of financial models. Most have come to accept that another crisis is pretty much certain, but that it’s also pretty much certain that no one can say with any degree of confidence when it will strike.
So, regulators now insist that banks keep a greater chunk of their wealth sitting in their vaults for when the inevitable happens. They also have to undergo regular ‘stress tests’ which simulate the impact of severe downturns. A close eye is also kept on smart-aleck bets of the kind that caused mayhem a decade ago.
None of this is guaranteed to stop a repeat of 2007, but it does reduce the risk. And when it comes to dealing with uncertainty, that’s as good as it gets. It’s an attitude that’s gaining traction elsewhere – and not before time. After spending decades and billions trying to predict natural disasters like droughts, storms and earthquakes, governments are increasingly focusing on identifying the high-risk areas, and taking action ahead of time.
Attitudes to global warming are also changing. Despite decades of effort, it’s clear that climate models still struggle with the complexity of predicting the future in detail. What is clear is that we can’t carry on the way we are, and must act now to reduce the risk of disaster. That’s a truth that is recognised in the much-maligned Paris climate accord, which calls not only for reductions in greenhouse emissions, but also efforts to adapt to a warmer world.
We may be witnessing a revolution in the way humanity deals with the inevitable uncertainties of life in a complex world. Prediction is giving way to adaptation. If so, it’s a case of back to the future. Our knuckle-grazing ancestors never kidded themselves they knew what the future held. They just adapted to whatever their gods hurled their way, from floods to Ice Ages. It’s taken us 10,000 years to realise they were right.
Still, better late than never.
“WE MAY BE WITNESSING A REVOLUTION IN THE WAY HUMANITY
DEALS WITH THE INEVITABLE UNCERTAINTIES OF LIFE IN A COMPLEX