I have just read a book, The Crisis of Global Capitalism, by George Soros. It was written in 1998, but oh so fit for 2008. Soros is a critic of the efficient markets hypothesis. I think he is right in saying that markets do not succeed in finding a balanced state, but act instead like a wrecking ball that swings uncontrollably around a point of stability.
In this book he describes a phenomenon, which he refers to as reflexivity. In systems that are made up of humans, like all markets obviously are, the ground truth is not independent from those that are trying to observe it. Instead, there is a constant bidirectional relationship between the observers and the observed. Similar problems are encountered in observing elementary particles, hence the Heisenberg uncertainty principle.
The book was written as a reaction to the Asian financial crisis and the Russian collapse. These events started a strong flow of capital to the established capital centers of New York and London. These flows made up the peak of the tech bubble. They were further prolonged by loose monetary policy. Now we are observing the turning point, where the wrecking ball hits the wall and turns back towards the point of stability.
If we want to actually reach the point of stability and stay there, there would have to be some kind of forces that would slow down the velocity of the ball while it speeds towards the point of stability. At the current situation, the global financial system is like a car without shock absorbers.
Every automation engineer knows that dampers are essential for stability. Why is it so hard for economists to realize that?
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