We are currently witnessing high volatility in financial markets around the world. The character of the volatility seems difficult to pin down and is, with a high degree of likelyhood different in nature than preceding financial disruptions.
Because we are not able to understand what is going on, our efforts at remedying the condition may well exacerbate it, without us knowing. Some actions will be right, some actions wrong and the combination of the two impossible to calculate at present.
Heavy debt and complex financial products such as derivatives aside, I wonder if one of the contributing factors in this debacle is the near frictionless transmission, commenting and retransmission of stories from the financial market. Some news organizations are keeping their heads cool, others seem to be publishing simple, highly affective messages that generate clicks.
With no daily respite from the markets, a higher degree of interconnectivity and some of the more frightening aspects of scale-free networks playing off each other to create a sudden Galloping Gertie effect.
Galloping Gertie, or the original Tacoma Narrows Bridge used a new and different kind of construction to build a lighter, cheaper suspension bridge that eventually succumbed to aeroelastic flutter. Happily, no lives were lost, but according to the Wikipedia article the failure
[…] also boosted research in the field of bridge aerodynamics/aeroelastics which have themselves influenced the designs of all the world’s great long-span bridges built since 1940.
The collapse showed the engineers that there were hitherto unknown forces at play, forces that were revealed by the collapse itself. In Max Boisot’s world, we might see the bridge as a sensor, one that is finally able to detect data types that have so far been invisible to us.
Othmar Ammann, a member of the Federal Works Agency Commission that investigated the collapse and a leading bridge designer in his own right later wrote
[…] the Tacoma Narrows bridge failure has given us invaluable information […] It has shown [that] every new structure which projects into new fields of magnitude involves new problems for the solution of which neither theory nor practical experience furnish an adequate guide. It is then that we must rely largely on judgement and if, as a result, errors or failures occur, we must accept them as a price for human progress (source)
I’m adopting Ammann’s analysis of this situation. We have combined complex financial instruments with frictionless information sharing and scale-free networks and are witnessing the effects. I hope we will discover what kind of aeroelastic flutter is at work this time.