Thanks for Holman Jenkins's "The Meltdown Remains a Whodunit" (Business World, Jan. 18) with its instructive discussion of the ideas of Jeffrey Friedman and Wladimir Kraus. Yes, we have to face a key reality: Well-intentioned but disastrous mistakes are made by very intelligent, well-educated, highly informed people, backed by vast computing power and reams of data, but wrong nonetheless. Just consider how the Federal Reserve's transcripts reveal its complete failure to understand the housing bubble. So the principle indeed applies to central bankers and regulators, in whom the Obama administration (like others before it) places so much faith, as well as to private financial actors and, of course, also to economists commenting from the sidelines. They simply did not, do not and cannot know the future that their own intertwined actions and ideas are creating.
As to why they all make the same mistake at the same time, consider that cognitive herding is a natural response to the inexorable uncertainty of the future. So central bankers, regulators, bankers, investors and academics cluster into the cognitive herd. To paraphrase a line from John Maynard Keynes, a prudent banker is one who goes broke when everybody else goes broke.
Alex J. Pollock is a resident fellow at AEI