Financial Markets and “System Effects”: Complexity, Recursiveness, Uncertainty and Mistakes in Finance
by Alex J. Pullock
American Enterprise Institute
July 24, 2012
With all of the knowledge and experience collected in financial markets and governments, why are we not able to avoid repeated disastrous mistakes like those that led to the US housing meltdown and the European sovereign debt crisis? It is because financial markets are governed by a recursive system of interconnected decisions, theories, strategies, predictions, actions, and expectations that lead to booms and busts. History shows that the complexity of these interactions makes it nearly impossible to predict accurately which way the markets will go. Regulators like the Federal Reserve are themselves too enmeshed in the system to avoid its systemic risk. We must recognize the reality of uncertainty and the absence of any godlike regulatory guardians.