Is the “Perfect Storm” Metaphor Appropriate for the Economic Crisis?

BY busadmin  August 7, 2009 at 11:44 AM EDT

storm in NYC; dietrich via Flickr

“The metaphor of the perfect storm is inapt. The captain’s action does not influence the height of the waves. Fed Chairman Bernanke, in contrast, participated in making and implementing interventions that worsened the financial crisis last year.” – from an essay on the NewsHour’s Bernanke on the Record forum, in the American Enterprise Institute’s journal, The American.

Paul Solman: Not being a reader of The American (I haven’t even got time for Henry James’ version, and I’ve meant to get to that book for about 40 years now), I wasn’t aware until recently of the conservative AEI’s objection to the metaphor we used for last year’s crisis. The central image we used in our explainer during the broadcast was how the Fed tries to “steer the course” between inflation and unemployment, an idea so uncontroversial that when I proposed to economist Bob Solow that we go out on a boat to illustrate 20 years ago with his fellow Nobel laureate and Martha’s Vineyard vacationer Franco Modigliani, Solow said: “Not THAT old cliche again.” The Perfect Storm seemed anything but ‘inapt’ to end the sequence this time around, given what happened last year.

But of course to those who think government generally makes matters worse whenever it dips in its oar, a “Perfect Storm” framing gets policy makers off the hook.

From my own observations over 37 years as a journalist, the last 32 of them covering business and government from an economics point of view, I come away with one unchallengeable conclusion: For every move by any policymaker ever, there’s a myriad of non-policymakers who’ll object. And sometimes object REASONABLY, I should add.

President Harry Truman is often quoted as having demanded a “one-armed economist” so he wouldn’t have to listen to his advisors say “On the other hand…” The NewsHour has long been criticized for always presenting at least two, and sometimes more, opposing views on any policy.

But hey, that’s life. You think managing human beings via institutions is easy? To snipe at policymakers is, to stick with our metaphor, shooting fish in a barrel; to make the policy, like pulling them out with a couple of fingers. And that’s not just true in government. How about the policy makers at Lehman Brothers? Or Citigroup? Or General Motors? Try running one yourself sometime. Or, to put it another way, who was the last deeply competent boss you worked for? And even she never make mistakes?

Sure, poor policymakers were involved in creating the perfect storm, even at the Fed, perhaps. There’s a provocative piece by Jeffrey Friedman, “A Crisis of Politics, Not Economics,” that convincingly fingers the government-encouraged monopoly of the ratings agencies as the ultimate culprit.

But even in his argument, there’s a perfect storm of sorts that leads to the adverse outcome. Let me end with former Fed vice- hair and remarkably sensible Princeton economist Alan Blinder, when I asked him about the Perfect Storm.

BLINDER: I think it’s an overused metaphor because of that movie I guess, but it was a perfect storm in the sense that a lot of things that shouldn’t have happened all happened at roughly the same time. We had the speculation in housing, we had a very deregulatory or anti-regulatory political environment which certainly affected the work of the regulatory agencies, we had tremendous amount of financial innovation – not all of it to the good but a lot of which just left the whole regulatory system behind. Like who was regulating CDOs? The answer is nobody. Who was regulating CDSs [credit default swaps) that AIG died of? Nobody. So all of that was happening simultaneously, in an environment that I’ve called the fixed income or interest rate bubble, because lending risk losses on all kinds of loans had been so low for several years.

Humans tend to extrapolate recent behavior too much and the belief just took hold in markets that you couldn’t lose money! That’s a very dangerous belief. If you don’t think your fingers might get burned you might stick them right in the oven and that was also happening at that time. So all of that was going on.

And so yes, it’s an overused metaphor, it’s an absolute cliché now and I can’t stand it when I hear people use it but it seems to me with regard to this particular circumstance, this particular episode, “perfect storm” does a pretty good job.