Shekhar Scindia, a very intelligent chap who I met through LinkedIn, gave me a call this evening and suggested that our work on the future of the global financial system should seriously consider the role of global monitoring of asset price bubbles and other market distortions as a way to prevent future crises. His vision is of a global regulatory network, linked through a social network, which would give regulators around the world the ability to flag bubbles or distortions as they develop, allowing monitoring, discussion and coordinated policy responses as required.
This suggestion has come up a few times during our research and workshops on the New Financial Architecture scenarios, although not with Shekhar’s interesting link to social networking as a channel. It’s something we need to discuss as a strategic option; as I mentioned in an earlier post, adequate monitoring is one element of robust systems – akin to fire alarms in buildings.
However, as one of my colleagues has pointed out in a comment, perhaps the value of what I like to think of as the “meerkat” approach (standing tall on a mound to spot eagles and snakes etc) might not be effective in the context of major market dislocations like the one we’ve experienced. There are a couple of arguments supporting this view:
- There is still a fair amount of disagreement on what constitutes a bubble until after the fact, and even then it might not be clear (i.e. with the recent oil price rollercoaster)
- There is even bigger disagreement about how to respond to asset price bubbles (I’m reading this speech by Frederic S. Mishkin from Columbia to better understand the options)
- You can’t predict black swans, which are the real danger
- Meerkats thrive in “mediocristan” while global financial markets are most definitely in “extremistan”
This combination of practical difficulties and ‘philospohical’ counter-arguments imply that we should put our efforts into designing a “cockroach” approach to crises – something that can survive a nuclear attack.
However an argument in favour of improving our monitoring is that, while the financial market is extremistan, asset bubbles are important “grey swans” that we can and should be better aware of. The question becomes, then, can we develop a system of montitoring, diagnosis and a play-book for response in the face of asset bubbles at a cost lower than that of the damage they do? Meerkats obviously think the energy expended in keeping a lookout for attack is less than the cost to a colony should something arrive unawares. If, given our warring economists, it turns out we can’t develop such a solution (and perhaps it’s worth expending some energy to try) our focus might indeed be better shifted to firewalls, redundancy and a cockroach-like approach.