Sonia Arrison

Network Theory Can Explain US Credit Crunch

The financial crisis currently consuming the U.S. has led tech industry leaders, such as Microsoft’s Steve Ballmer, to speak out in favor of quick Congressional action. Tech stocks, as well as general stocks, have plummeted, and there is confusion over why this crisis is happening and spreading so fast. One explanation that makes a lot of sense draws on network and information theory.

“[The U.S.] market economy is nothing more than a vast, parallel-processing information network,” explains noted economist John Rutledge in his new book Lessons From a Road Warrior. Network theory, the examination of interconnected systems, can help us understand the current market crisis, because it can aid in identifying and understanding cascading information network failures.

When a “super node” in a network goes down, for example, it has the potential to take down the whole system, since these key nodes are connected to many others. Perhaps the most familiar crash of this sort is a power blackout. If a storm or accident takes down a single power line, it can lead to a power loss for a whole city. That type of crash, Rutledge explains, is exactly what is happening now.

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October 3, 2008 | Comments |

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    If we wish to enjoy the benefits of a free market system, we need to act responsibly, The free market system is not a license to steal. These executives apparently did. Because they abused the system and financially hurt many people and companies, the unintended consequence will be more regulation.

    However, as as been learned from financial collapses in the past, certain well-conceived regulations help the system function, because it keeps the system in a state of equilibrium.

    Thus, the Glass-Steagall Act erect walls between banking and insurance industry, which would have made the "innovations" that AIG created impossible. Many now undoubtably wish that the Glass-Steagall Act was not so unwisely gutted in 1999.

    But regulations will now be put into place to prevent a recurrance of this problem, but the damage has been done, already.

    All those who pushed for de-regulation have created much needless sufferring, that is only about to begin.

    The effort to steal $700,000,000,000.00 will just increase the backlash against those who have created this problem and are also about to benefit from this theft.

    Those on the far right who scream the accussation of "Class Warefare" every time someone proposes a law with even a little equity in it (like a slightly less regressive tax code) have not seen anything yet.

    Hallalejuah!
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    Well, I suppose network theory could explain how a complex system collapses. However, it does not identify the causative factor. The causative factor is not an abstract concept such as network theory. The causative factor for the financial crises were the very concrete and the willful actions of corporate executives in creating financial instruments that turned out to be devoid of value. To phrase this a bit differently: No one forced these executives to use so-called "innovation" to create a ponsi scheme.

    If we wish to enjoy the benefits of a free market system, we need to act responsibly, The free market system is not a license to steal. These executives apparently did. Because they abused the system and financially hurt many people and companies, the unintended consequence will be more regulation. Minimizing the imposition of regulation requires acting responsibly and pointing out those who are abusing the free market system. Attempting to off-load the cause of the financial crises on abstract esoteric concepts misses the real world effects resulting from the concrete purposeful actions of corporate executives abusing the free market system for their own selfish benefit..
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    This is a very misleading analogy. A less-poor analogy is when a developer asks his OS for 10K of memory and gets a pointer... but it's only for 3K of memory. Are you going to trust the method you just called? Are you (the big banks) going to buy a mortgage bundle from a bank that claims they are worth 1M and 15% of the assets default? Are you going to buy stock in those banks that currently own mortgages where 15% or more of the assets may end in bankruptcy? Will you lend to a small business? There's the problem. It starts in housing, but is not contained therein. Our economy has plenty of "bandwidth" and intelligent agent leaf-nodes which are very able to find new interfaces. The problem is that we are learning that things are not as stable as we had hoped. Step 1 is to discover the value of the assets that the failing / merging banks hold. Step 2 will probably be taking those assets (the "bail out" bill) from those banks and leave them holding more stable assets so those who will lend to them can trust that they can perhaps actually pay. :)

    Sorry to be so negative, but man, this post is really misleading.
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    Not actually the whole, it will power up the others.. Because there will be a traffic shift..
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    Just what we needed: an additional layer of metaphoric complexity on top of an already astoundingly hard to understand situation.

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