"A theorem: In matters of military contingency, the expected, precisely because it is expected, is not to be expected. Rationale: What we expect, we plan and provide for; what we plan and provide for, we thereby deter; what we deter does not happen. What does happen is what we did not deter, because we did not plan and provide for it, because we did not expect it."
- Sir Michael Quinlan, cited in 'The Secret State: preparing for the worst; 1945-2010' by Peter Hennessy. Hat-tip to S.G.
Another theorem: two years after the failure of Lehman Brothers, literally anything is possible. In financial markets, the boundaries of possibility had previously been circumscribed by a limited number of core beliefs or assumptions: that debt rated "investment grade? was sound; that credit ratings agencies were broadly competent and, as state-sanctioned quasi-monopolies, acted objectively on behalf of the public good; that developed world government debt was essentially riskless; that investment businesses that became insolvent could be wound down in an orderly manner; that regulation of the financial sector existed; that banks operated on a broadly level playing field with the rest of the economy; that financial markets were largely benign structures that operated efficiently; that bankers were motivated by considerations other than greed and self- preservation. In shorter form, that free market capitalism worked.
Some, if not all, of those assumptions have not survived their first serious contact with the enemy. We are increasingly accused of labouring what we perceive as the unusual if not unique "riskiness? of the current situation, as if we weren?t already aware that sounding a continual note of extreme caution is not exactly conducive to encouraging new investment business. At the risk of appearing either trite or inadvertently offensive:
- First the sub-prime assets sold off, And I wasn?t much bothered because I didn?t own sub-prime assets. Then the bank stocks sold off, And I wasn?t much bothered because I didn?t own bank stocks. Then the equity markets sold off, And I wasn?t much bothered because I have a diversified portfolio.
- Then Big Government stepped in and bailed out everybody,
- And I got a little bothered because I believe in free markets and not the socialisation of banking losses.
- Then government finances became imperilled,
- And I got a little more bothered because there are only so many safe havens.
- Then neo-Keynesian economists were allowed to dominate the debate,
- And…
