Perspective

Lawrence Summers, in today's LA Times, writes: "The future's so bright? The markets are pricing in tranquility as far as the eye can see. The commentariat begs to differ. ... The year 2007 will begin with a vast difference between the popular view of global risks as priced in financial markets. While the commentariat has been more alarmed about the state of the world than global markets for some years, the gap increased in 2006 as markets became more serene and everyone else grew more anxious."

Looking at the frequency of financial and terrorist disruptions, Summers concludes, "While each of these events was unique, the record does suggest that crises of some variety occur in about one of every three years. At least as far as the markets are concerned, perhaps the main thing we have to fear is the lack of fear itself."

Who or what predicts best? Is it the markets or the experts? Both have formed subjective distributions of the likelihood of such episodes. Perhaps market participants are also factoring in the amazingly quick recoveries from each of the events Summers mentioned.