Comments on: Counterparties http://blogs.reuters.com/felix-salmon/2011/07/20/counterparties-399/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Danny_Black http://blogs.reuters.com/felix-salmon/2011/07/20/counterparties-399/comment-page-1/#comment-28758 Thu, 21 Jul 2011 02:03:51 +0000 http://blogs.reuters.com/felix-salmon/?p=9037#comment-28758 As a matter of curiosity, how do you explain all the bank failures in the 80s and the relative robustness of non-US, non-UK banks in the crash if Glass Steagal was a casual reason for stability? What was that about data and theories?

]]>
By: ErnieD http://blogs.reuters.com/felix-salmon/2011/07/20/counterparties-399/comment-page-1/#comment-28734 Wed, 20 Jul 2011 16:17:52 +0000 http://blogs.reuters.com/felix-salmon/?p=9037#comment-28734 @engineer27: I think one of the most important things that is going to come out of the 2000-2020 timeframe is an understanding that economists do not have the tools yet to predict failure or poor performance of their systems to anything like the precision and accuracy that they believe they currently have.

Modern “quantitative” engineering is a couple of hundred years old now. During that period, engineers have learned that models and calculations only take you so far – there are too many variables to nail everything precisely. as a result, the safety factors and redundancy you mention are essential to having a functioning system with longevity.

The 1930s Glass-Steagal provided the equivalent of an engineered financial system with safety factors and redundancies built in. It worked very well for over a half-century. During that period, the economists went mathematical and believed that they could accurately predict real responses to policy changes. They then decided they could become Icarus, repeal Glass-Steagal and fly close to the sun. We have now rediscovered that those engineered factors of safety and redundancies in Glass-Steagal were the primary factors preventing financial system collapse, although very few economists and politicians want to admit that.

The RMBS, debt-ceiling, government pension, European bonds, and Wall Street derivatives crises are likely to drive home the point over the next decade that a new Glass-Steagal Act is essential for democratic capitalism to survive. Unfortunately, the financial and economic carnage to achieve that end game winning position is likely to resemble the ’30s.

]]>
By: engineer27 http://blogs.reuters.com/felix-salmon/2011/07/20/counterparties-399/comment-page-1/#comment-28731 Wed, 20 Jul 2011 14:49:31 +0000 http://blogs.reuters.com/felix-salmon/?p=9037#comment-28731 @ErnieD: One thing we engineers could contribute would be to get the economists to understand that there is always a tradeoff between efficiency and reliability (some call it “robustness”). It isn’t efficient for the Space Shuttle to carry all those redundant systems into orbit each trip, most of which never get used. But engineers understand the value of reliability and its associated costs.

Similarly, it isn’t necessarily efficient for banks to carry lots of reserve capital. It also isn’t necessarily efficient for an economy to maintain production capacity for a vital product (food, for example) when specialization and trade are viable options. But redundancy and other inefficiencies can often buffer a system from unexpected shocks.

]]>
By: ErnieD http://blogs.reuters.com/felix-salmon/2011/07/20/counterparties-399/comment-page-1/#comment-28730 Wed, 20 Jul 2011 14:18:17 +0000 http://blogs.reuters.com/felix-salmon/?p=9037#comment-28730 One of the easist ways to differentiate economists from almost everyone else in society is to simply look for the people who are never wrong regardless of whether or not the data prove their theories.

I am an engineer. It would be very useful to me to simply ignore data that appears to disprove my working hypothesis – it would make solving problems so much easier. It would also be useful for when something I design fails, because you can simply state that the data demonstrating that the failure occurred is incorrect and the theory shows that the structure is still standing, regardless of what the eye-witnesses say. In fact, because the theory says that the structure is still standing, we should replicate the design and increase the rewards to the designer!

]]>