On September 17th I shared my thoughts on the financial crisis, stating that part of the problem has been the increasing degrees of separation between ourselves, our investments and the process of making money:
The further you are removed you are from a situation or an object, the more difficult it is to monitor and control. Time is not your friend and things can spiral out of control quickly and without your knowledge.
Over the past 10-15 years we’ve come to see computers manipulating huge sums of capital online and financiers using ambiguous instruments like derivatives. It’s okay for hedge funds to use bizarre arbitrage and unsafe leveraged positions because they are â€˜smarter’ than we are.
Our disconnection has come back to haunt us again.
It fascinates me that for all its sci-fi underpinnings, it seems an increasing reality that we are moving towards a singularity (see my post here). I believe that our general disconnection, coupled with the growing gaps in wealth, education and technology only reinforce the likelihood of a world-wide cycle of booms, busts and economic chaos in the foreseeable future.
Today the New York Times explores a similar notion in an article called, The Rise of Machines:
Somehow the genius quants â€” the best and brightest geeks Wall Street firms could buy â€” fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and â€” poof! â€” created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, â€œOpen the bank vault doors, Hal.â€�
As the current financial crisis spreads (like a computer virus) on the earth’s nervous system (the Internet), it’s worth asking if we have somehow managed to colossally outsmart ourselves using computers. After all, the Wall Street titans loved swaps and derivatives because they were totally unregulated by humans. That left nobody but the machines in charge.
â€¦When Treasury Secretary Paulson (looking very much like a frightened primate) came to Congress seeking an emergency loan, Senator Jon Tester of Montana, a Democrat still living on his family homestead, asked him: â€œI’m a dirt farmer. Why do we have one week to determine that $700 billion has to be appropriated or this country’s financial system goes down the pipes?â€�
â€œWell, sir,â€� Mr. Paulson could well have responded, â€œthe computers have demanded it.â€�
The question then is not only one of market stabilization, but also of the need to recalibrate on a human capital level. What does it mean for America that a crisis affecting us all is only understood by such a small minority of intellectual elites?