I was critical last week of commentators who describe the financial crisis as “psychological”.
Those who blame a “lack of transparency” are on stronger ground – although ignorance of the facts or the law is not a valid excuse in other domains of life.
The process chart above describes something called a Financial Products Markup Language which is said (on its website) to be “the business information exchange standard for electronic dealing and processing of financial derivatives instruments”. The idea is to “streamline the process supporting trading activities in the financial derivatives domain”.
The chart looks neat and orderly – hygienic, even, with all that blue – but reflect a moment: The system has been programmed for deranged individuals who, as we now know, believe that exponential growth to eternity is a right and proper basis for the design of the world’s financial system.
GIGO – or Garbage In, Garbage Out – is a phrase used by computer programmers to remind laypeople that computers “will unquestioningly process the most nonsensical of input data and spew out mountains of erroneous information in a short time”.
Where we’re at now is that systems designed to “streamline” the market have been spewing out financial derivatives which, insofar as anyone can count them, now amount to eight hundred times global GDP.
This mass of red stuff (the red wedge on the inverted pyramid above, also known in financial circles as “toxic sludge”) has now started to leak out of the balloon. And that’s why this crisis is not psychological.
For Dan Roberts in The Telegraph “the real mystery is how the negative feedback loop in the financial markets became so devastating. How could this domino effect happen so quickly? How could we lose control of something we designed to serve us?”.
It’s not a mystery. Think back to Three Mile island . (The photo above is of its mis-named control room.) During that calamity, within a few seconds after the physical accident at the nuclear reactor began, more than a hundred warning lights were flashing in the control room.
“I would have liked to have thrown away the alarm panel,” one of the duty operators, Craig Faust, said later. “It wasn’t giving us any useful information.” Water pumps, the turbine and the reactor had all unexpectedly shut down. But none of the blinking lights told the operators what they needed to know.
Or wanted to know.
In today’s financial discontinuity, the complexity of the information available (think of all those screens) has been compounded by two further factors: a lot of the trading is driven by powerful semi-automated systems ; and a lot of people clearly have not wanted to know what the screens were telling them.