On flash crashes and their prevention

How often do you encounter something important and find yourself thinking “how is it that I didn’t know about this already?”. It happened to me last week when reading an FT piece (£) by Gillian Tett on the flash crash experienced by the US equities market in May 2010. On the afternoon of 6th May the market lost nearly a $1tr in value in half an hour, only to recover most of that value by the close of the day’s trading. An enquiry followed, but no one has yet established precisely what happened.

Tett’s article draws on a Foresight report by Dave Cliff and Linda Northrop for the Government Office for Science that looks at the global financial markets from a perspective rooted in ICT and systems engineering. Cliff and Northrop argue that the world economy had a lucky escape in May 2010. Had the flash crash happened a couple of hours later the market would not have recovered before closing. As a consequence East Asian markets would have plummeted and worldwide financial meltdown could have been triggered.

Given that all this was news to me, and is clearly highly significant, I spent some of my New Years Day reading the report. [Read more…]

On knowing what’s going on

Leading active members of today’s economics profession … have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. … They oppose the most basic, decent and sensible reforms, while offering placebos instead.

James K Galbraith

Last weekend in a brief post over at Pop Theory Clive poses one of the key social scientific questions of our time – What do economists know? Of course, the answer depends on which economists one is talking about. As the epigraph above notes, the mainstream of macroeconomics largely misses the point. It didn’t see the current economic turmoil coming and has little to offer by way of solutions. One striking thing about Galbraith’s comment is that it was written in 2000. Not a great deal has changed since then. These deficiencies with mainstream approaches have been recognised by some high profile mainstream practitioners, as I noted last month in the aftermath of this year’s Nobel prize in economics.

Yet, it is not as if economics has nothing sensible to say on the matter. [Read more…]