Friday, October 9, 2009: 10:00 AM
I was reading an article by Jeffrey Sachs, in Scientific American, where the text below drew my attention:
“There is little doubt that unduly large swings in macroeconomic policies have been a major contributor to our current crisis. During the decade from 1995 to 2005, then Federal Reserve chairman Alan Greenspan overreacted to several shocks to the economy. When financial turbulence hit in 1997 and 1998—the Asian crisis, the Russian ruble collapse and the failure of Long-Term Capital Management—the Fed increased liquidity and accidentally helped to set off the dot-com bubble. The Fed eased further in 1999 in anticipation of the illusory Y2K computer threat. When it subsequently tightened credit in 2000 and the dot-com bubble burst, the Fed quickly turned around and lowered interest rates again. The liquidity expansion was greatly amplified following 9/11, when the Fed cut interest rates sharply (eventually to a low of 1 percent in June 2003) and thereby helped to set off the housing bubble, which has now collapsed.”
It occurred to me that several credit mimes with the sense of Dawkins are penetrating the niche of the credit portfolio evolving in a logistic way i.e. slowly at the beginning, then bursting to finally saturate. The decision to allocate credit to the new penetrating credit mime may be described by a Fokker-Planck equation whose stationary solution is showing bifurcation behaviour. This model may describe the discontinuous decision to abandon a certain type of credit and allocate the money to the rest of the portfolio. The parameters driving this decision are: cost of risk (potentially measured by e.g. spread or volatility) and benefit (measured by e.g. interest).
The model presented is suggesting a broader research program that could verify the conjectures made such that to quantify and predict potential discontinuous behaviour.
“There is little doubt that unduly large swings in macroeconomic policies have been a major contributor to our current crisis. During the decade from 1995 to 2005, then Federal Reserve chairman Alan Greenspan overreacted to several shocks to the economy. When financial turbulence hit in 1997 and 1998—the Asian crisis, the Russian ruble collapse and the failure of Long-Term Capital Management—the Fed increased liquidity and accidentally helped to set off the dot-com bubble. The Fed eased further in 1999 in anticipation of the illusory Y2K computer threat. When it subsequently tightened credit in 2000 and the dot-com bubble burst, the Fed quickly turned around and lowered interest rates again. The liquidity expansion was greatly amplified following 9/11, when the Fed cut interest rates sharply (eventually to a low of 1 percent in June 2003) and thereby helped to set off the housing bubble, which has now collapsed.”
It occurred to me that several credit mimes with the sense of Dawkins are penetrating the niche of the credit portfolio evolving in a logistic way i.e. slowly at the beginning, then bursting to finally saturate. The decision to allocate credit to the new penetrating credit mime may be described by a Fokker-Planck equation whose stationary solution is showing bifurcation behaviour. This model may describe the discontinuous decision to abandon a certain type of credit and allocate the money to the rest of the portfolio. The parameters driving this decision are: cost of risk (potentially measured by e.g. spread or volatility) and benefit (measured by e.g. interest).
The model presented is suggesting a broader research program that could verify the conjectures made such that to quantify and predict potential discontinuous behaviour.