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April 10, 2013

As Washington's top risk seeker, Richard Berner crunches numbers to see around dark corners in the economy

Here’s an experiment not to try: Drive down a country road on a moonless night and kill the headlights. Try to navigate only by the dials on your dashboard. How far do you think you’d go without crashing?

Depends, right? On how fast you’re driving, on how sharply the road twists, on whether there are guardrails lining the shoulder. It makes a huge difference what you’ve got on your dashboard. Ideally you’d want a GPS and an array of infrared cameras. But imagine using only a speedometer.

Last year, a new and obscure government agency tried that experiment, in thought anyway. The car was the U.S. financial system, and regulators were in the driver’s seat. The point was to assess the dashboard at their disposal. The agency looked at 11 of the best gauges economists have developed to measure the likelihood that the financial system is headed for another crash. And it found them, taken together, to be as useful as a speedometer — “which does not predict crashes but is still a useful risk indicator.”

What that exercise tells us is how little the government knows even today about what could trigger the next big financial wreck.”


Read full Washington Post article here

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