How is the impact force of the shaft?
In my first contribution, we have identified the neo-liberal economic course of the Reagan era as the original trigger, and the belief in the market's self-sufficient forces.
How is it from the moment of the release to this mighty, powerful wave, how does it spread? How does she achieve all her destructive power? There are essentially these four elements that contribute to the development of this tsunami-like financial crisis:
Too high speed due to global networking
At the beginning of the 60, Stanley Milgram developed a theory. He hypothesized that everyone in this world is connected to everyone through six contacts. The theory went down in social research as the "small-world phenomenon". In a world where everyone is already connected to everyone through a social network, this phenomenon is even more relevant to the financial world.
Instead of people, machines trade with each other there and are networked around the clock - 7 days a week, 24 hours a day. As a result of this strong networking, innovations in the financial sector can spread much faster than regulators ever have the opportunity to intervene. This fact very quickly leads to catastrophic aberrations.
Risky financial innovations
Innovation is closely linked to finance. By developing options, risks could be better hedged, for example. The development of credit default swaps has allowed bank limits to be extended.
The downside of all these innovative developments was that it opened the door for speculators. Similar to a pyramid game, a few very rich and many investors were very poor. Not otherwise, Warren Buffet described these instruments as weapons of mass destruction. These financial innovations finally found their way into the financial sector and caused enormous damage.
Greed is a vice
This is a driving force that is all too human. The immeasurable pursuit of wealth and power. In my book I describe how geniality (the human side of innovation) coupled with greed could unfold to a tremendous destructive force.
I had the opportunity in personal interviews, with people such as John Meriwether or Andy Krieger - both of which will be discussed later - to shed light on this dark side of finance.
The butterfly effect
That small causes can have great effects, Edward discovered. N. Lorenz in his modeling of the states in the earth's atmosphere for the purpose of long-term weather forecasts. This effect, also known as the butterfly effect, plays an important role in our financial systems today and explains, among other things, why bubbles can increase rapidly over the years by positive feedback.
A new, innovative business model or product can quickly spread through permanent adaptation and positive feedback. The risks and implications underlying the business model are often overlooked at the outset. In the course of time, however, they are clearly visible and enlarge, until finally they can hardly be managed. It is thus the initial underestimation of the consequences of a financial innovation, which later becomes a problem.
The builder of the financial crisis
As my research has shown, all four elements play an important role in the creation of a tsunami and are thus the builders of today's financial crisis. The prerequisite for this is the global networking of the trading systems, as well as the inexperienced practice of soliciting entire teams in the financial world and thus simply copying successful products and business models, regardless of the associated risks.
By means of financial innovations, one is usually one step ahead of the existing set of rules and can thus bring risky financial products to the people. In addition, the human weakness of overconfidence, coupled with the pursuit of even more wealth, plays a crucial role. Together, they ensure that the wave picks up more and more speed.
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