mathbabe

That was great, Mathbabe. You know how to pierce right through the bull-shit to get to the core of the issue. Well done, I really enjoy your site. I think we are always going to have “London” and “New York” whales until federal regulators can get their “shitake” together as shown in my following comments:

To Edward Ingram, Head of the INGRAM SCHOOL OF ECONOMICS

It is always a delight to read your research and comments.

You do make the complex easier to understand. This is so important in today’s unpredictable and chaotic world where we look to science and mathematical models to provide certainty and answers – and then blame such when things go wrong.

There have been some important writers/theorists such as yourself who have shown why our faith in scientific certainty may be a dangerous illusion, and how only by embracing science’s inherent ambiguities and paradoxes can we truly appreciate its utility and harness its potential to better society.

The recent financial crisis has shown in vivid color how Wall Street’s over-reliance on algorithms to provide certainty in uncertain markets and to undecidable problems in risk management gave bankers and regulators an illusion of protection.

The government considered the financial crisis a sector specific problem – the banking industry problem and took a policy response that focused only on the banking industry when passing the Dodd-Frank Act. Unfortunately, all recent crises, mortgage/banking/finance crisis; economic crisis; environmental crisis; international crisis in relations between secular and religious worlds (i.e. Middle east and Africa); currency and trading crisis; and political crisis are likely connected.

These events are not disparate, one-off crises but a continuum of harmful consequences from the discord inherent in our modern culture. We have too many contradictions where the huge divide in education, commerce, and technology between sovereign nations allows the apple cart to topple over more easily and spill over to other areas, causing disparate crises.

It is easy to say we need to come up with a radical different way of thinking, such as the cliche, “got to think outside the box.” How do we do that? Of course the box has gotten much bigger over time. There are greater interconnections facilitated by media, computer, band-width/Internet, globalization, ad infinitum.

Looking just at banking. Regulators are pinning their hat on preventing the next crisis by having all large and complex bank self-prepare a resolution/liquidation plan in the case that the bank fails. This is out and out foolishness and only placates the public by suggesting regulators are doing something to prevent the next crisis. On top of this, international regulators are pushing all central bankers to require sovereign banks to apply the same bank capital mode, by requiring implementation of Basel III capital requirements. This is nonsense and merely shows politicians took expedient action without seeking the optimal response and best solution to ward off any future crisis.

The government needs, instead, to take a better look at “science of risk and certainty” and see how best to harness it. For sure, one cannot capture all uncertainty in a model or algorithm. There will always be blind spots and frailties that cannot be described. This, however, does not negate the efficacy and utility that risk management tools and models can bring. By denying that their are blind spots and denying the concept of the “loss of certainty,” we set the stage for not making the progress we need to identify and eliminate risk.

Obviously, the financial crisis, too, has shown us how black swans statistical models can be misused and provide a false sense of security to banks and to regulators (London whale at JP Morgan Chase s a recent example.) If we do not spend time applying science and mathematics in finding a better means to identify black swans and prevent risk model flare-ups, we are always going to have unexpected crises.

We need academics, economists, and regulators to work hand-in-hand to determine if black swans (flare ups that occur due to blind spots) can only be identified or predicted after the fact. After they occur. Is there really intrinsic randomness and unpredictability in the financial world, in derivatives trading, etc. If this is the case, then it is fine for federal regulators to require the largest and most complex banks to prepare resolution/liquidation plans since failure is not preventable. Is this really the conclusion that our national leaders have taken? Or, was this solution taken out of expediency?

It would appear essential for large banks, academics, thought-leaders, to take a better look at the science of uncertainty and see how it can be harnessed to prevent any future crisis, no matter the industry most affected. Also, this inquiry needs to focus on the interconnected on what has traditionally been seen as disparate, on-off events, or singular crises. We are doing society a disservice if we do not spend more time to determine how crises are interrelated.

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