Japan Disaster & Global Markets: "Nobody Knows Nuthin'"

Assessing impact of Japan crisis proves again economists & other self-styled experts have very little idea what they're doing. As so-called "black swans" proliferate, it becomes increasingly clear these events are all too predictable !!!
By: EconomyWatch
 
March 24, 2011 - PRLog -- Veteran screenwriter William Goldman was once asked what it takes to produce a successful Hollywood film,

and is famously said to have shrugged his shoulders, and replied, "When it comes to making movies, nobody knows nuthin'".

So too, it seems, for global markets, when it comes to inter-locking natural and human disasters such as the ones now playing out in Japan.

As always, the risks are evident in hindsight.

The Tokyo Electric Power Company built its Fukushima Daiichi nuclear power plant, nearly 40 years ago, to withstand a powerful earthquake —

but not one as big as the 9.0-magnitude quake that struck on March 11.

Or the tsunami that followed.

Now, the terrible “ifs” accumulate, as Japanese engineers work to bring the station’s reactors under control.

The ultimate price, in human life, may not be known for years.

The details of this catastrophe were unforeseeable, leading some to conclude this was a so-called / self-styled / alleged black swan event —

something so wildly unexpected, so enormous in its impact, that it seems to defy our understanding and expose the fragility of our knowledge of the world.

Could anyone have predicted this?

Well, in 2007, Tokyo Electric Power, or Tepco, escaped a disaster at its huge Kashiwazaki-Kariwa nuclear power station, on the opposite side of Japan,

when that plant was damaged by a 6.8-magnitude earthquake —

three times as large as what the plant was designed to withstand.

Tepco basically lucked out last time.

So perhaps a bigger question is whether the markets — in which we have come to place so much trust — can put a true price on outsize risks like this.

Many have compared the events unfolding in Japan with 9/11, Hurricane Katrina, the financial collapse of 2008 and 2009, the BP oil spill, and the uprisings in the Arab world —

all of which have shown clearly the limits of the collective wisdom of the marketplace.

For a moment, all the swans seemed black.

And those swans seemed blacker still when viewed through the lens of today’s hyperkinetic global markets.

“There are an amazing number of crosscurrents in the world economy right now, more than I’ve seen in 25 years,”

said Shawn Reynolds, a co-portfolio manager at Van Eck Associates in New York.

Like everyone else, corporate executives, economists and financial analysts in Tokyo, New York, London and beyond

struggled last week to wrap their heads around the scale of this disaster.

But, as they so often do, the analysts quickly fell to work assessing the implications for companies, markets and economies.

This is what happens on Wall Street ...

In an article in the centennial edition of the American Economic Review in February,

Professor Stavins said that economists have not come close to solving the “tragedy of the commons,”

the quandaries that arise when many people, acting in their own self-interest, ultimately pose a threat to the common good.

For instance, how should we allocate environmental costs to power producers?

How should the environmental costs of various fuels — fossil or nuclear — be calculated?

So far, the markets seem to have failed to provide an answer to all of those questions ...

Mohammed El-Erian of Pimco says the outlook is unusually uncertain.

Investors, like everyone else, should understand that the world is a risky place.

“You need to use a whole range of approaches to understand the market in a situation like this,” he says, “and you need to be humble.”

And, perhaps, accept a sober reality: the next -- so called / self-styled / alleged / but all-too-predictable -- black swan is DEFINITELY out there somewhere.


Read more at economywatch.com: http://www.economywatch.com/economy-business-and-finance-...

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