The Economic Crisis is Not a Perfect Storm

Vincent R. Reinhart, of the American Enterprise Institute, writes an insightful article that says the analogy of the current economic crisis as a "perfect storm" is inaccurate and allows Fed Chairman Ben Bernanke off the hook.

The problem with the perfect storm analogy is that it suggests economics as a force of nature beyond our control, that can create storms from far-away regions that come together to destroy life, limb, and property. There are two problems with this analogy.

First, economics is the sum total of human actions in the pursuit of happiness on an individual level aggregated to certain levels of abstraction. Without humans, the earth would still have weather systems and storms. Without humans, the earth would have no economy.

Second, actions by individuals like Hank Paulson (Bush Treasury Secretary), Ben Bernanke (Fed Chairman), and Timothy Giethner (Obama Treasury Secretary) directly affect the economic system.

As Reinhart says, "That is why the metaphor of the perfect storm is inapt. The captain’s action does not influence the height of the waves. Bernanke, in contrast, participated in making and implementing interventions that worsened the financial crisis last year."

I have previously discussed the fact that the economic system, the stock market, the weather system, and the global ecosystem are both chaotic systems (sensitive to initial conditions) and complex adaptive systems (many independent interacting agents create non-deterministic emergent phenomena). Despite the fact that all these systems are similar, exhibit similar phenomena, and follow similar patterns (the power law distribution), that does not mean that the analogy of a perfect storm is appropriate for the current situation. Mostly because it neglects to portray Bernanke's and others' decisions as part of the system itself.

We must have a realistic and accurate portrayal of the economic crisis even if we are to use analogies as the foundation for understanding. The "perfect storm" analogy does not cut the mustard.