Quants, Comics and Financial Catastrophe: Explanations for What's Going on with the Markets

The markets continued their decline yesterday, and the question for today is: what the hell is going on?

The British satirists John Bird and John Fortune have a terrific skit that may explain in part. To sum up: the financial markets are run by the "greatest minds in the world" who after careful consideration either run around yelling Sell! Sell! Sell! or Buy! Buy! Buy!. Check it out here.

Actually Bird and Fortune are talking about last summer’s sub prime mess in particular but what they have to say is even more appropriate today when, despite some rather robust action around the world, stock prices continue to tumble. What’s going on at the moment may also be affected by the decision making systems put in place by financial engineers or quants. These bright young mathematicians working for financial institutions have made elaborate models for banks which are so complex that the market decision makers don’t understand them and so can’t make appropriate decisions. The situation is aggravated by the fact that these models—despite their sophistication—are not really adequate to explain or predict the markets, an Agence France Press story warns. What we have is signals to sell coming on all sides from the programs the quants have developed, but which can’t really deal with new information and arrangements just set in place by governments.

Are we going to have to declare a world wide bank holiday for a few days the way Roosevelt did in the 1930s in order for the overheated decision making systems to cool off? Would it even be possible to do that?

I guess we have nothing to do but wait and see. Hold on to your hats--and maybe your shirts too.