Massive government response has stanched the economic crisis from a pandemic meltdown. So far. New regulatory mechanisms are emerging, and some key indices ( unemployment, market confidence, wholesale inventories, emergence from TARP) point to a healing.

Many changes yet to emerge are structural.  For example, half the jobs lost in the US are not expected to reappear.  Lower cost manufacturing will continue to migrate out of the developed countries. .  Futurists predict the US’ relative advantages will tend towards service, health and information.  China and Israel are gearing up to lead in marketable developments in alternative energy. Meantime, in the US each opening is being chased by six jobseekers;  small businesses, which traditionally have created new jobs, are still wary of the future.

In financial regulation, the complex meltdown has forced the issue among governments to cooperate to some degree on global monetary coordination and regulation.  But what about the diverse fiscal spending policies, even among the EU, and ultimately intractable issues of regional protectionism (all politics, after all, are local)?

How should financial entities  be regulated?  Does one focus on regulating the systems, or the component players?  Can they be regulated?  ( One even hears of debates about regulating “systemic risk” – when the very definition of that phrase implies a complexity beyond regulation.)

Here’s quick “impressionistic” grab of key clues. The world is characterized by a combination of (a) enormous complexities (governments, markets, institutions, cultures, politics) on the one hand, (b) where “high frequency” financial transactions and communications privately happen in millionths of a second, (c) in elusively ever creative new venues such as the private “dark pools”.   Containing these electronically enabled transactions would be like trying to muzzle the internet.

How complex? Try these other clues:

• The WSJ reports that the U.S. and U.K. support to banks in the current crisis equates to nearly three-quarters of those countries’ annual economic output.

• The world’s 10 largest banks account for about 70% of global banking assets, compared with 59% just three years ago (Capital IQ and the Bank for International Settlements).  The US administration may want to deconstruct the enormous institutions that are “too big to fail”,  but it’s unlikely that the US regulators would/could order these institutions to reduce their scale or to open its many layers of subsidiaries and affiliations to scrutiny – much less, regulation.

• Bigness is a complicated debate unto itself ( see in Too Big To Fail http://knowledge.wharton.upenn.edu/articlepdf/2352.pdf?CFID=11773080&CFTOKEN=61980107&jsessionid=a83067815a9924854822555d2b4955597b25 )  and Wharton’s Richard Herring says it’s not so much firms being too big but that they are too complex and too opaque. He notes that the 16 largest financial institutions control 2.5 times as many subsidiaries as the 16 largest non-financial firms – one such financial firm  controlling 2,435 subsidiaries, half of them chartered in other countries.  The article also points out that the complexity makes it difficult for anyone — including regulators and the companies’ own managers and directors — to fully understand all the risks the firms are taking, or how those risks might interact with ones other companies are taking.

• Who knows the true extent of money expansion ?   With the many layers of financial instruments and derivative values that there are, the US Fed really only accounts for less than a third of the creation of its money.

• The institutions will likely agree to conduct derivatives transactions in a more open and transparent exchange mechanism.  But who can claim to keep up with the increasingly esoteric creation of derivatives upon derivatives, or the many transactions among the many players? (http://www.georgewashington2.blogspot.com/2009/11/fed-talking-about-reducing-leverage-is.html)

• In the jousting between free market and regulatory mechanisms, there will always be new instruments and new venues.  Private groups in a free market trade within private “dark pools” (http://www.marketwatch.com/story/the-secret-stock-market-upstart-systems-rewrite-rules-of-trading?siteid=yhoof).

Mr. Paul Samuelson, that dean of  quantitative economics, has just passed away.   But I recall how an economics professor with a straight face would intone “… all things being equal…” and list the simplifying assumptions underlying his explanatory equation,  that in the end hardly yielded a readily specific solution.  Even thirty years ago, the enormity of the complex of factors made it a big jump from  explanatory equations to practicable policy.

Oh, there will always be the survivors,  those with access and moxie and resources, and the luck to be in the right place at the right time, and the instinct know when to move on.  But this genie, the complexity and the scale of interactions in an electronically enabled global economy, is beyond putting back into the box. Not the old box anyway.

Massive government responses seem to have stanched the economic crisis from a pandemic meltdown.   New regulatory mechanisms are emerging, and some key indices ( unemployment,  market confidence, wholesale inventories, banks emerging from bailouts)  point to a healing.

Many changes are structural and have yet to fully emerge.  For example, half the jobs lost in the US are not expected to reappear.  Lower cost manufacturing will continue to migrate out of the developed countries.   Futurists predict the US’ relative advantages will tend towards service, health, and information technologies.   China and Israel are gearing up for marketable developments in alternative energy. Meantime, in the US each opening is being chased by six jobseekers;  small businesses, which traditionally have created new jobs, are still wary of the future.

The complex meltdown has governments exploring more concerted global monetary coordination and regulation.  But what about the diverse fiscal spending policies, even among the EU, and ultimately intractable issues of regional protectionism (all politics, after all, are local)? What to make of US national debt  levels at 60-70% of its GDP; or that in ten years debt interest service will exceed all spending on defense, education and transportation (See WSJ)?

And how should financial entities  be regulated?  Does one focus on regulating the systems, or the component players?  Can they be regulated?  ( One even hears of debates about regulating “systemic risk” – when the very definition of that phrase implies a complexity beyond regulation.)

Here’s a quick  grab of key clues. The world is characterized by a combination of (a) enormous complexities (governments, markets, institutions, cultures, politics) on the one hand, (b) where “high frequency” financial transactions and communications privately happen in millionths of a second, (c) in elusively ever creative new venues such as the private “dark pools”.   Containing these electronically enabled transactions would be like trying to muzzle the internet.

How complex?  Consider these:

• The WSJ reports that the U.S. and U.K. support to banks in the current crisis equates to nearly three-quarters of those countries’ annual economic output.
• The world’s 10 largest banks account for about 70% of global banking assets, compared with 59% just three years ago (Capital IQ and the Bank for International Settlements).  The US administration may want to deconstruct the enormous institutions that are “too big to fail”,  but it’s unlikely that the US regulators would/could order these institutions to reduce their scale or to open its many layers of subsidiaries and affiliations to scrutiny – much less, regulation.
• Bigness is a complicated debate unto itself ( see in Too Big To Fail )  and Wharton’s Richard Herring says it’s not so much firms being too big but that they are too complex and too opaque. He notes that the 16 largest financial institutions control 2.5 times as many subsidiaries as the 16 largest non-financial firms – one such financial firm  controlling 2,435 subsidiaries, half of them chartered in other countries.  The article also points out that the complexity makes it difficult for anyone — including regulators and the companies’ own managers and directors — to fully understand all the risks the firms are taking, or how those risks might interact with ones other companies are taking.
• Who knows the true extent of money expansion ?   With the many layers of financial instruments and derivative values that there are, the US Fed really only accounts for less than a third of the creation of its money.
• The institutions are agreeing to conduct derivatives transactions in a more open and transparent exchange mechanism.  But who can claim to keep up with the increasingly esoteric creation of derivatives upon derivatives, or the many transactions among the many players? ( Check out this good brief on this.)
• In the jousting between the free market and regulatory mechanisms, there will always be new instruments and new venues –   private groups in a free market trade within private “dark pools”.

Paul Samuelson, dean of  quantitative economics, has just passed away.   But I recall how an economics professor with a straight face would intone “… all things being equal…” and list the simplifying assumptions underlying his explanatory equation that in the end hardly yielded a clear solution.  Even thirty years ago, the enormity of the complex of factors made it a big jump from  explanatory equations to practicable policy.

Oh, man is resilient, and there will always be the survivors:  those with access and moxie and resources; the luck to be in the right place at the right time; and the instinct to know when to move on.  But  the complexity and the scale of interactions in an electronically enabled global economy, is a djinii beyond putting back into the box. Not the old box anyway.

Meantime, check out  this interesting demonstration of how certain universalities still bind us humans together. Enjoy!