The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

by Nate Silver

Hatzius wrote on November 15, 2007: The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized. . . . The macroeconomic consequences could be quite dramatic. If leveraged investors see $200 [billion in] aggregate credit loss, they might need to scale back their lending by $2 trillion. This is a large shock. . . . It is easy to see how such a shock could produce a substantial recession or a long period of very sluggish growth. Consumers had been extended too much credit, Hatzius wrote, to pay for homes that the housing bubble had made unaffordable. Many of them had stopped making their mortgage payments, and there were likely to be substantial losses from this. The degree of leverage in the system would compound the problem, paralyzing the credit market and the financial industry more broadly. The shock might be large enough to trigger a severe recession. And this is exactly how the financial crisis played out. Not only was Hatzius’s forecast correct, but it was also right for the right reasons, explaining the causes of the collapse and anticipating the effects. Hatzius refers to this chain of cause and effect as a “story.” It is a story about the economy—and although it might be a data-driven story, it is one grounded in the real world.