CRASH OF 2008

Too Big to Fail - Crash of 2008



Too Big to Fail - Crash Of 2008

Introduction

Economic idea has modelled itself on theoretical physics. It has sought to establish timelessly valid laws that govern economic behaviour and can be used reversibly both to explain and to predict events. But rather than of finding regulations adept of being falsified through checking, economics has progressively turned itself into an axiomatic control and esteem comprising of assumptions and mathematical deductions - alike to Euclidean geometry.

Rational anticipations idea and the efficient market hypothesis are goods of this approach. Unfortunately they verified to be unsound. To be helpful, the axioms should resemble reality. Euclid's axioms contacted that condition; reasonable anticipations idea doesn't. It postulates that there are correct outlook of the future to which the outlooks of the participants are inclined to converge. But the correct outlook is correct only if it is universally taken up by all the participants -- an improbable prospect. Indeed, if it is impractical to anticipate all participants to subscribe to the idea of reasonable anticipations, it's irrational for any participant to take up it. Anyhow, reasonable anticipations idea was attractive conclusively falsified by the crash of 2008 which apprehended most participants and most controllers unawares. “The crash of 2008 furthermore falsified the Efficient Market Hypothesis because it was developed by interior developments inside the financial markets, not by external shocks, as the hypothesis postulates”. (Paul, 2009, pp. 141-150)

 

Critical Analysis

The malfunction of these ideas adds the whole edifice of economic idea into question. Can economic phenomena be forecast by unanimously legitimate laws? I argue that they can't be, because the phenomena revised have a basically distinct structure from natural phenomena. The distinction lies in the function of thinking. Economic phenomena have considering participants, natural phenomena don't. The considering of the participants inserts a component of doubt that is missing in natural phenomena. The doubt arises because the participants' considering does not unquestionably comprise reality.

In human activities considering assists two functions: a cognitive one and a causal one. “The two purposes hinder with each other: the unaligned variable of one function is the variable of the other. And when the two purposes function simultaneously, neither function has a really unaligned variable”. (Paul, 2009, pp. 15-18)

Reflexivity inserts a component of doubt both into the participants' comprehending and into the position in which they participate. It renders the position unpredictable by timelessly legitimate laws. Such regulations live, of course, but they don't work out the course of events.

Economic idea leapt through numerous hoops seeking to eradicate this component of uncertainty. It begins out with the assumption of flawless knowledge. But as Frank Knight displayed in his publication, “Risk, Uncertainty, and Profit published in 1921, in situation of flawless information there would be no room for profits”. (Mark, 2008, pp. 141-150)

The assumption of flawless information was restored by the assumption of flawless information. When that verified insufficient to interpret how financial markets foresee the future, economists evolved the idea of reasonable ...