A COMPLEX SYSTEM VIEW ON THE FINANCIAL AND ECONOMIC CRISIS

 

Didier Sornette

 

ETH Zurich, Professor of Physics and of Finance (Chair of Entrepreneurial Risks)

Member of the Swiss Finance Institute

Co-founder of the Competence Center for Coping with Crises in Socio-Economic Systems

(http://www.ccss.ethz.ch/)

 

We argue that a proper assessment of the presently unfolding financial crisis and subsequent developing economic slowdown, and its cure, requires going back at least to the late 1990s, accounting for the cumulative effect of the ITC, real-estate and financial derivative bubbles (not to speak of the 2003-2007 stock market bubble, oil and commodity bubbles). We briefly discuss some of the key implications for policy and regulations. In a nutshell, the complex system view suggests that most recommendations will either fail or aggravate the problems by unintended feedbacks and consequences. The core of the problem is traced to the unsustainable growth and proportion of the (virtual) wealth in the ``financial economy'' compared with the ``real economy''. A multi-disciplinary approach is needed to deal with the nonlinear complex systems of the present world, in order to develop a culture of fairness, and of upside opportunities associated with a risky world.