UNCERTAINTY BREEDS MORE UNCERTAINTY

The ratings agencies really didn't know how to evaluate the Big ShitPile but gave a bunch of AAA-ratings anyway. This has lead to a collapse in the market and that in turn has lead to greater uncertainty.

Fall in US house prices heralds problems for all
By John Authers

Published: May 24 2008 03:00 Last updated: May 24 2008 03:00
FINANCIAL TIMES

This leads markets to a final, profound problem: unpredictability. Nobody has modelled the historical experience of default rates in response to negative equity, because there is no historical experience of it.

Similarly, there is no experience of national house prices falling so sharply in nominal terms.

Ben Bernanke, Fed chairman, said in 2005 that the US had "never had a decline in housing prices on a nationwide basis". Such a fall is under way.

Hence a national fall in nominal house prices is a perfect example of a "black swan" - an exceptional event that has not been covered in historically based models. Such events, widely discussed in recent months, can lead to extreme and unpredictable responses in financial markets.