Re: LTCM and Low-Probability Events

From: John Conover <>
Subject: Re: LTCM and Low-Probability Events
Date: 24 Jan 1999 00:47:06 -0000 writes:
> conover wrote:
> Thanks for info. It seems complicated. I'll have to think on it. Maybe the
> international financial system doesn't need changing. I'd just like to see the
> working man get  more of the pie.

Oh, George, I didn't say it doesn't need changing. I don't really know
if it needs changing, or not-or even if we could if we wanted to. I
was just giving an example of why derivatives and hedging in the
international financial system is an essential service that makes the
global economy work.

I think we need to reevaluate it, however, in light of the speed of
modern global electronic trading. Capital can take flight very
quickly-and this is a relatively new phenomena of the last few years,
(and is probably a significant contributor to the Contagion, depending
on who is telling the story, of course.)

It is a complicated question, and I am not sure there are any
reasonable answers, either. If we attempt to regulate capital dynamics
in the US, capital will simply move somewhere else in the
world. That's the nature of global electronic trading-capital follows
the path of least regulative resistance.  By attempting legislation,
we could be shooting our self in the foot.

Computerized trading may well have ushered in a new era of eternal
high volatility in world markets, forever more-and we may simply have
to learn how to live with it. The principles of entropic economics
(ie., economics with foundations based on information-theoretic
paradigms,) can be of some assistance in that endeavor.

On the other hand, such a transition would require a paradigm shift
from traditional macroeconomic manipulation of economies to entropic
optimization-a transition that is difficult for many economists-not to
mention politicians-on epistemological grounds.

Such a transition would not be easy. It never has been. The twentieth
century has been the century of such information-theoretic transitions
in the professions-the mathematicians had to transcend Godel-the
physicists, quantum mechanics. Both Godel's Incompleteness theorem and
Heisenberg's Uncertainty are information-theoretic issues. In both
cases, the professions not only surmounted the transition, but
flourished because of it.

The Contagion is being observed by many as a significant test of the
viability of the concepts and paradigms of macroeconomics.

And, you are right George. It is complicated. Very much so.



John Conover,,

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