Thursday, August 27, 2009

Systemic risk

Moral: Wherein we continue the Quants series.


We're not picking on these lowly workers; no, the intent is to get at the motivation behind the scene. What is that? Well, it's essentially a "license to steal" (concept has been used before) that seems to have become acceptable, if enough money is behind the thrust and if a market ideology is overlaid as a cloak.

James Fallows (Atlantic) says that Dr Doom (who has some good news) likes Timmy's work. After all, as the NY FED guy, he (Timmy) was talking systemic risk way back in 2003. Perhaps, now he has an opportunity to do something rather than just jaw bone.

Just to get the discussion started, one big piece of systemic risk is the rapid growth of types and kinds of computational resources being applied to support markets. Ah, you say, they could not work without the computer.

That is true. Yet, in many cases, those who provide the service hide behind a proprietary wall. Just remember how Madoff pulled off his feat. Too, that high-frequency trading (see Remarks: Wait! More exposures: "computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else's expense." To anyone who isn't at Goldman Sachs or the like, does that appeal to you as the way that we ought to be handling our beans?) is seen with such glamor, with a hint of respectability, suggests something.

Where the heck has common sense gone?

Every day, there ought to be an accounting of the markets that has some meaning. No, not just some figure like the closing DOW. Actually, something like a SOX for the market is a good analogy, yet we all know the grief that that initiative spawned. And, did it prevent this current mess?

Who can do an accounting? Does the FED know its own balance sheet? How can they know the economy's?

Oh, too, the markets are 24/7, you might argue. Ah, is that so by necessity? If we use a biological metaphor, what complex entity does not sleep?

Actually, probably as much effort ought to go into accounting and scrutiny as it does into efforts as maximizing the sizes of some pockets. We can probably use those media who watch (another example) as an example, yet it needs to be a deeper look.

Well, it's obvious that the accounting will be computational. So, there is no reason to take this as the grumblings of one who is anti-progress.

The problem is that the computational is new, non-intuitive, and run by wizards. All of this allows lots of room for exploitation and mischief.

Did I mention mis-used mathematics and theoretical flim-flam? That, too. Of course, truth engineering suggests that there isn't an easy answer (see Remarks).

Or, let's look at it again: Some statements in this blog deal with the Philosophy of Science (here's another nice little rundown), in particular as it applies to one issue contended by mainstream economics against the Vienna school: Critics of the Austrian school contend that by rejecting mathematics and econometrics, it has failed to contribute significantly to modern economics. Additionally, they contend that its methods currently consist of post-hoc analysis and do not generate testable implications; therefore, they fail the test of falsifiability.[5] Austrian economists contend that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions.

Ah, falsificationism, but what does that have to do with making oodles of money by the best-and-brightest (see Goldman's Town Hall)?

Well, we can start with lessons to learn. One is that some things are undecidable no matter how much computational power is thrown at them. Therefore, they need considered thought (and voting - ah, not necessarily by a market game!).

Somehow, the PDE aura allows some type of pass on reason (ah, fairy dusting).


01/15/2015 -- This week, this post is getting read. Great! Nice little piece of work (kidding, in part) so many years ago. ... At last, a series that will establish the basis and extensions, as required. We are going to go back to some simple and come forward to the modern, complicated economy. Why? My long chain of ancestors (inherited via Prof. Lucio Arteaga) is one motivation.

12/06/2013 -- If only Ben would put a shot across the bow. He's helped the chimera unfold in unhealthy ways. He could, at least, say a mea culpa.

01/27/2012 -- Ben will continue to sack the savers; he must love the ca-pital-sino.

10/10/2011 -- If the OWS wants specifics, there are plenty to list.

02/01/2011 -- The chimera shines.

10/07/2010 -- Several principles need to be explored, such as the ergodic one.

05/07/2010 -- Out of control, essentially, and not healthy for the backbone.

02/10/2010 -- We could probably use the auto (and recent events) as a way to characterize the concepts of the blog. Of course, we have the value versus quality mis-think as part of the problem. Business Week reports that Toyota was asking suppliers for a 10% cut. Well, such scrimping would have an effect, even if it was only in looks. However, cutting into the life of a system may appear smart but, actually, relies on the same unstable basis as does a lot of economic thinking.

01/03/2010 -- More news on Goldman Sachs as the uber example of 'not on the behalf' comes to fore regularly. It'll need to be a separate subject at some point. Thanks to McClatchy: Nov 1, 2009 & Jan 3, 2010 (update). Goldman has to respond, of course.

12/15/2009 -- Requiem for the dollar (WSJ) and responses.

12/03/2009 -- Rationality and risk. Need a new look.

10/05/2009 -- Ah, yes, on the behalf of.

09/15/2009 -- Lessons, one year after Lehman. Also, Time on culprits. Ben is happy-talking, again.

09/09/09 -- We'll need to look at UUUN, as a framework.

09/04/2009 -- It has been decided about Ben, the saver sacker. We still need to discuss the overarching metaphor for the economy. Quants are it!!

Modified: 01/15/2015

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