Knowing and Making

Last year Myron Scholes predicted the credit crisis would be over on 7th March 2009. That's coming up this Saturday, so how's the prediction looking? Well, AIG has lost $60bn and received a further capital injection; the US government has just converted a bunch of debt into 30-odd percent of Citigroup; Martin Wolf has written another article with some nasty-sounding predictions. We're running short of time to fix the system if Myron is to be proved right. To be clear, this is not about the recession. I don't think we expect economic growth to start in the next four days. It's about fixing the problems in the financial system so that money can start flowing and the recovery can properly begin. The debate in the US over nationalisation is growing louder. Unusually, the argument is getting simpler rather than more complicated: the losses are there, shareholders have been (as close as makes no difference) wiped out, so do the remaining losses go to creditors or taxpay...

Just in case you think I've gone mad, this is Myron Scholes ' prediction, not mine. He made it at a speech to Chicago Graduate School of Business in June, which I forgot to write up at the time. He was referring to the credit crisis rather than the economic downturn, but even then it was pretty clear that recession was on the way. So let's keep an eye on the calendar and if he's right, he's due our congratulations. Unfortunately he slightly spoiled the effect later in the presentation by referring to the prediction as March 9th 2009. So we need to allow error bars of a few days in measuring the end. Oh for the days when such a prediction from an esteemed (though a little less than before LTCM went under) Nobel prize winner would be self-fulfilling. Now, maybe if Warren Buffett said the same thing, it would be...