“I can see ... only one safe rule for the historian: that he should recognize in the development of human destinies the play of the contingent and the unforeseen.”
——H.A.L. (Herbert Albert Laurens) Fisher (1865–1940), British historian and politician, preface to History of Europe, 1935.
Living in a World of Contingency …We are well into what is now being called The Financial Turmoil of 2007, still without fully understanding how broad and deep the turmoil will be and without a clue to how it will end. We wish it would fade, as Wordsworth said, “…into the light of common day.” But wishing won’t make it so. We all need to accept the situation for what it is—one of many contingencies. We can estimate, but we don’t really know.
What don’t we know?
- No one knows how many of the mortgage loans now in foreclosure will result in losses for investors, how large the losses will be, which investors will bear them, and what consequences the losses will have.
- No one knows how many of the loans now in default will become tomorrow’s foreclosures.
- No one knows how many of today’s performing loans will become tomorrow’s defaulted loans.
- No one knows how much loan modification will take place, thereby forestalling loan defaults but also (possibly) aggravating investors’ losses.
- No one knows how the opacity of today’s structured financial products will affect investors’ appetites for these kinds of products in the future.
- No one knows how long it will take for borrowers’ and investors’ confidence in financial institutions and products to be restored or how much capital will have to be raised for the restoration process.
- No one knows what spillovers from housing to the broader economy, if any, will occur as our economic, legal, and financial systems grope for a new equilibrium.
- And no one knows how the cumulative effect of all these contingencies will feed back into the system that determines mortgage loan holders’ ability and willingness to pay their obligations in the future.
Here is an image that sums it up pretty well: In describing the time when quantum physics replaced classical Newtonian physics, the physicist Heinz Pagels said, “The world changed from having the determinism of a clock to having the contingency of a pinball machine.” (The Cosmic Code, 1982)
Policymakers clearly recognize that they are living in a far more uncertain world than they are used to; certainly the press statements and speeches of Federal Reserve officials have underscored this point. Heightened uncertainty does not mean, of course, that what can go wrong, will. In fact, it is probably human nature, in stressful times, to overestimate the likelihood of worsening outcomes, just as it is our habit to overestimate the likelihood of continued good outcomes in boom times.
In times such as these, it is natural for everyone affected by the financial turmoil to second-guess their own thoughts and decisions because the systems we are dealing with are so complex. What to do? As the British biologist Thomas Henry Huxley put it, “Patience and tenacity of purpose are worth more than twice their weight of cleverness.”