The past week saw the entire world commemorating the first anniversary of the collapse of a financial giant and the subsequent domino effect it had on the leading financial institutions in the world. On this occasion I cannot help but recall a quote from a movie which said "There is no true way of forgetting something than by commemorating it".
I read through scores and scores of articles in hopes of finding out what triggered the global financial crisis. I read through written works of financial scholars, Op-eds by economists, even personal accounts from those who were in the middle of all the action. But none of them could boldy point out the culprit behind it all.
Even President Obama's speech failed to pin point the major factor behind the global financial crisis, a crisis of a magnitude unseen since the days of the Great Depression.
Do not misunderstand me. It is not that I am unaware of the sea of explanations offered - the lack of regulations, the government's inability to step in at the right time, "the too big to fall" myths, the complex financial instruments, the bubble to burst theories etc etc.
However I stand by one rule. If we truly knew what caused this entire mess , we would have fixed it by now.
They say: "Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we're still recovering, they're choosing to ignore those lessons." - President Obama
I say: Thats precisely the point Mr President. The mere reason why no body has tried learning any lessons from the Lehman debacle is because no body is clear yet as to what the mistake actually was.
I will not be working my head over something, even the financial geniuses of the world couldn't discern. However in light of the morass of views presented in the last one week, I will present an alternate perspective, one that is shorn of all complexities. One that in its simplest form can be considered a satire on all the explanations being poured forth.
However, as a layman, I wondered whether we should have holded discussions on the so called complex financial instruments or instead invested time in studying the psyche of an investor. In effect what we saw was nothing but the world gripped by a confidence crisis spreading like a virus from the investors in Wall Street to the ones in Dalal Street.
Although the miscalculations of the self-obfuscated financial instruments were to blame, the financial tsunami that pervaded through the world and wrought havoc in various economies had more to do with the diffidence among the investors.
Mental resilience as a security
In the future perhaps, banks won’t just hire analysts and 'quants' to evaluate their risk models and investment strategies. Perhaps they could do with a little help from psychologists who could study the patterns of responses among their clients during financial duress. We might get to see banks using the measure of an investor’s confidence as a security as against a property worth monetary value. Who knows we might even see counseling sessions for those who are quick to sell off their securities on the smallest impulse.
It is indeed a farce to think that the world's financial stability depends on a person's mental attitude. It is even worse that markets in developing nations crash because FIIs have their moments of pessimism.
Complex algorithms
But what could trump the irony of this situation. What could be even more of a travesty than the above mentioned economic models which are based on people's feelings? As the world looks towards the banks and financial behemoths for detailed explanations as to what their complex models entailed, the banks have held their hands up in defeat, claiming even they don’t fully understand the monster that they have created. How then, did the bank heads, who sanctioned these risk models feel secure enough to let them control the market?
Stock options are based on the Black-Scholes model. This model states that stock price movement can be equated to the random movements of particles suspended in a liquid. However, such models when applied to finance study the aggregate actions of people. Ergo, it becomes a study of the collective psyche of people.
Meanwhile, banks aren't the only ones relying on complex computer algorithms. Climate models have long been using the same modeling systems that were put to use at Wall Street. Despite being touted as the next victims of computational models, climate models are seen as being less prone to such fallacies, since their models are not based on people's underlying confidence in CO2 molecules.
New breed of employees
In the future we may see banks recruiting a new breed of employees, who along with their respective degrees hold an additional degree in psychology so that they can complement the inadequacies that are inherent in the present risk models and study exactly how the mind of an investor works.
So at the end of the day as nations point fingers at each other, a layman, who had no part to play in instigating this crisis, wonders what it was that went wrong. How much of the blame has to be borne by the mathematicians and physicists who gave birth to these computational models?
What's the moral of the day? Computers are only as good as the programs they are fed. The human mind, however, can be far more complex and much more difficult to comprehend as evidenced from last years financial maelstrom.
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