Friday, February 26, 2010

A little about me

Why is it that a "hundred-year flood" means once in a hundred years, but a "hundred-year storm" seems to last a hundred years?

I got two books for Christmas from my grandson's mom and dad --

  • False Economy by Alan Beattie, and
  • The (mis)Behavior of Markets, by Mandelbrot & Hudson.

Over the holidays I got most of the Beattie book read. But then I put it down, and didn't finish it until a week or so ago. I'm not a fast reader; and that is an understatement.

Anyhoe, what with the hundred-year snowfall we've been having these past two days, I started getting into the Mandelbrot book. I'm only through the Preface, but something about the book bothers me.

Markets are complex, and treacherous. The bone-chilling market fall of September 29, 2008 -- a 7 percent, 777-point plunge in the Dow Jones Industrial Average -- was, in historical terms, just a particularly dramatic demonstration of that fact. In just a few hours, more than $1.6 trillion was wiped off the value of American industry -- $5 trillion worldwide.

Mandelbrot's concern is not economics, nor markets in general, but financial markets in particular: stock markets. His objective, it seems, is to reduce the treacherousness of markets. Not to avoid the behavior that leads to disaster, but to improve the ability of investment bankers to dance close to the edge:

It is time to end the tunnel vision of our bankers and regulators. The accepted "close enough" is no longer good enough for the computer models with which they manage economies and markets. A pretty good grasp of typical market conditions is no longer adequate; what is needed is real understanding of how markets work and why prices move.

Mandelbrot offers a more complex economic model, so that Wall Street can take us close to the edge in safety. But I think he misunderstands the nature of economic behavior. No matter how close Wall Street is to the edge, if it thinks itself safe it will take us closer yet to the edge.