Just because you model it wrong, doesn’t mean it failed

Do markets really fail, if the failure is really in the fact that the financial system had the wrong belief?  In other words, the market does note suffer a failure simply because the model you use to predict market performance is wrong.

Interesting essay in the NYT magazine today, which leads with:

Among the most astonishing statements to be made by any policymaker in recent years was Alan Greenspan’s admission this autumn that the regime of deregulation he oversaw as chairman of the Federal Reserve was based on a “flaw”: he had overestimated the ability of a free market to self-correct and had missed the self-destructive power of deregulated mortgage lending. The “whole intellectual edifice,” he said, “collapsed in the summer of last year.”

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