Understanding How Wall Street Tried to Calculate Risk - And Missed the Human Factor. Will a New Congress and an Obama Administration?

The day after the election means a new playing field for Capitol Hill and Wall Street. While most of the country is contemplating what the new administration means for them, there are a number of folks from Capitol Hill to K Street contemplating what the new administration means for congressional races in 2010. Normally the party in the White House loses seats in an off year election, and 2010 promises to be an interesting economic time in the country.

Here's why you care: The Wall Street Journal's Maura Webber Sadovi reports that the worst is yet to come in the Los Angeles real estate market. It matters to you because this isn't just about housing, it is about commercial real estate prices that are impacted by - yes, that's right - the softening economy. As Americans tighten their purse strings, so too does corporate America. The interconnectivity in this article is the important part, because Los Angeles is not going through this as an island. If the worst is yet to come in some areas, that means 2010 is not likely to be rosey.

So, if you are Congress and need to find a way out of economic peril, but you also know that what you do is about to be graded in two years (really less because the campaign cycle will be full throated in one year) what's the balance between helping Main Street and Wall Street? What's the balance in enabling risk taking and guarding against it? If your brain hurts with these questions, especially the day after election day, it is supposed to - these are not easy things.

That's why you really need to read Steve Lohr's article in the New York Times today. It walks you through how Wall Street tries to mathematically calculate risk. He will show you that those credit default swaps were really conceived as a hedge against risk. And the punch line is that no matter how much fancy math or fancy laws are used often times human behavior becomes the x factor. This is thoughtful reporting that everyone should read - you can bet those with offices on Wall Street, K Street and Capitol Hill will be digesting it. You should too, it is the crux over the debate about "regulation".