UNKNOWNS

Economics is riddled with the problem of known and unknown "unknowns," to use former SECDEF Donald Rumsfeld's phrasing.

First we have the known unknown: People Lie -

(h/t Paul Krugman) The WSJ lets us know that even bankers are prone to lying:

The concern: Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates.

Second, we have an unknown unknown: Human Behavior is hard to predict:

(h/t Calculated Risk) This is from a Wachovia conference call for analysts:

Q: Kevin Fitzsimmons, Sandler O'Neill: Could you give a little more detail on -- you cited dramatic change in customer behavior or consumer behavior and that led to the decision to cut the dividend, increase capital and so just wondering if you could be particular by -- I'm assuming it's California, but are you talking about people walking away from houses and if you can give any specific examples, thanks.

Ken Thompson, Wachovia Corporation - CEO: I'll let Don talk specifically but I would just say that what we are seeing is that when equity in the home approaches zero, behavior changes.

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer ... It's difficult on the walk-away part of the question, that is going on, clearly and there's lots of evidence of that in the market. It's hard to quantify though, from the standpoint of how many of our defaults are just walk-away and the reason is people, they don't tell you. And so we do our best to try to gauge but that portion of the defaults is just kind of hard to quantify.