Saturday, September 27, 2008

Some links I found to be interesting:

Stopping a Financial Crisis, the Swedish Way.

Letter to congress by a number of economists.

Letter to the editor in the washington post.

And now a random thought. I wonder to what extent scientists and engineers are responsible for the current financial crisis.

Hear me out. I know for a fact that many investment banks will hire graduates from technical fields (math, physics, engineering) with no knowledge of economics, finance, or law. As far as I can tell, what most of these people do when they get to wall street is something like modeling and prediction of time series, without much concern for the theoretical economic models that generate these time series. Of course, my sample size for making this assertion is around 3, so take it with a grain of salt.

When a time series is nice and regular, trying to predict it is not unfeasible, but rare events - say occurring once every 70 years, or, even worse, for the first time - create problems. There is no good way to predict them based on the data alone; the only hope is to think of whats possible in terms of the fundamental laws which generate your time series, which, in this case, probably requires a really good familiarity with economics and with the american regulatory framework.

But since a lot (most?) of people on wall street don't have this familiarity, they tend to fuck up in major ways every time a rare event occurs. This is a recurring pattern, manifesting not just in the current crises, but also (recently) in the asian financial crisis and the collapse of LTCM.


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