Where Fun Comes to Die

The phrase was coined by a series of sketches in Monty Python’s Flying Circus, parodying the actual Spanish Inquisition.  In these sketches, a character would exclaim in frustration, “I didn’t expect the Spanish Inquisition!” at which point the Inquisition cardinals would burst onto the scene shouting, “Nobody expects the Spanish Inquisition!”

“Spanish Inquisition” type events are unexpected because they are singular.  But as we stand on the brink of another singular event, one that the Bank of England Deputy Governor Charles Bean referred to on Friday as “a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history,” one wonders whether it might not be a good idea to start regularly factoring in the possibility of a Spanish Inquisition after all.  But if so, how?

Is it smart to factor in the possibility of a Spanish Inquisition type event?  On the one hand, even a very small chance of a great calamity can be significant.  On the other hand, they are infrequent and difficult/impossible to predict.  Of course, Nobel winning economist Paul Krugman has been praised for predicting the current housing-bubble crisis.  But as fellow Chicago grad Megan McArdle pointed out, “If you keep predicting a recession, eventually you will be right.”  Still, expecting calamity can be profitable.  I know a guy who has been shorting the market since late 2007.  When I spoke with him in April, he felt certain that the market would continue to decline through December when most of his puts expired.  I questioned his judgment then, but can only imagine how much money he has made this month.  Anecdotally, it seems smart to expect a Spanish Inquisition event, but so does playing the lottery.

Still, many suggest that we could and should plan for such calamities.  The problem is, how?  If these calamities result from systemic failures, could we rely on the same system to predict and prevent them?  Regulation may work when the problem is confined to a few power players and firms, but in something like the current financial crisis, the problem extends past that small group and spreads to the general populace.  Like a typical zombie movie, the infection spreads until all succumb and become part of the problem.  At that point, might it be better to let the disease run its course?  The weak may die, but the strong will be inoculated against another similar calamity, as was arguably the case with the Great Depression generation.  Anything else we could do would not be a cure, but rather just an attempt to alleviate symptoms.  Until we discover a vaccine, we may have to live with the occasional Spanish Inquisition.

So the Monty Python boys were mainly right: no one expects a Spanish Inquisition, except the people who always expect a Spanish Inquisition (useless) and those who have lived through a similar calamity before (inoculated).  Once someone expects it, they would be hypervigilant to prevent it, which involves its own problems including (wasted?) energy, effort, risk averseness, paranoia, and being a cantankerous grandparent.  The more accurate phrase then is perhaps “The Spanish Inquisition only occurs when not expected, but expecting it can be its own version of torture.”  But, that’s decidedly less catchy.