Can a School of Fish Prevent the Next Financial Crisis?
Laura Banks, 33, shakes her head as she watches her three daughters have breakfast. They were sharing the last portion of cereal in the box and washing it down with a bit of milk. It was all Laura had to give them until she gets her meager paycheck tonight. A former office secretary, Laura now works part time at a convenience store. The recent economic crisis had left her and thousands of others in financial despair. Burying her head in her hands, she can only wonder: why didn’t the so-called experts see this one coming?
To many economic analysts and forecasters, the question of the next global financial crisis is not a matter of if but when. They believe that the world economy is a giant tinderbox that is just waiting for the spark to set it off. On the other side of the coin, other economists believe that the next financial crisis could be prevented if the right ideological model in the economy could be put in place.
The Not-So-Rosy Picture
The great global recession of 2007 – 2012 is believed to have been caused by the U.S. mortgage-backed securities that were marketed worldwide. The speculative bubble in real estate that was made worse by increase in prices of commodities led to tremendous drop in international trade coupled by a rise in unemployment rates.
The finger pointing puts blame at the financial sector – the banks – that shows a short-sighted and narrow-minded approach in granting loans and placing their investments in high-risk portfolios. A recent example is JP Morgan Chase’s billion-dollar loss in its risky trades. It appears that banking institutions look at the bigger economic picture through the narrow eyepiece of profits, using a business forecast model that is based on assumptions and probabilities. Complex systems such as economics must use a method of prediction that will capture the full details of the underlying systems and not merely rely on approximations.
This is where an analogy with ecology and other sciences will come in handy, as advocated by complex systems specialist David Orrell. He is of the belief that economics, just like ecology, is a complex system that requires a delicate balancing of opposing forces where a slight difference in the representation will have a tremendous effect. It is the same view held by George Sugihara of Scripps Institution of Oceanography who believes that natural systems mimic the functions of the financial markets. Simon Levin, an ecologist at Princeton University, pointed out the similarity in natural systems and financial markets in terms of competition for very limited resources resulting to individuals trying to maximize return and competing and cooperating in the exploitation of the limited resources.
Learn from the Fish
Sugihara used as analogy a failed fisheries management project in the US National Marine Fisheries Service. The Service studied how to maintain a sustainable population of a fish species by assessing every aspect of the species alone, ignoring the external environment such as the species’ predators and prey. The project failed because it ignored the food chain that makes the species’ life possible.
Having a clear picture of how the food chain operates and identifying the critical players will identify the weak link in the chain. It will avert a catastrophic result, such as the annihilation of a particular species, by correcting any possible breach in the chain.
These advocates of adopting a natural systems model in the financial market have pointed to predator-prey ratios in the ecosystem that have remained stable over millions of years. They believe that if the factors behind such stability could be adapted into the financial market, the next financial crisis could be averted.
The Trophic Web Solution
These advocates believe that if the trophic web that is used in ecology to map the dynamics of energy transfer in predator to prey relationship will be applied in the financial sector, it will create a model showing the dispersal of things of value in the market. It will give the economists and financial planners the ability to track monetary flow while identifying the players and links in the banking system. Just like in the ecological food chain, any possible breach of the chain because of a weak link could be remedied and the catastrophe be averted.
A timely correction of the web will allow for safety valves to catch any threat – such as deflation of the currency, tightening of the credit market, or a rumor of bank run – before it grows into unmanageable proportions.