The money forecast

A review of The Money forecast A Haldane New Scientist 10 Dec. 2011. On-line version is To Navigate economic storms we need better forecasting.


Andrew Haldane, ‘Andy’, is one of the more insightful and – hopefully – influential members of the UK economic community, recognising that new ways of thinking are needed and taking a lead in their development.

He refers to a previous article ‘Revealed – the Capitalist network that runs the world’, which inspires him to attempt to map the world of finance.

“… Making sense of the financial system is more an act of archaeology than futurology.”

Of the pre-crisis approach it says:

“… The mistake came in thinking the behaviour of the system was just an aggregated version of the behaviour of the individual. …

”    Interactions between agents are what matters. And the key to that is to explore the underlying architecture of the network, not the behaviour of any one node. To make an analogy, you cannot understand the brain by focusing on a neuron – and then simply multiplying by 100 billion. …

… When parts started to malfunction … no one had much idea what critical faculties would be impaired.

    That uncertainty, coupled with dense financial wiring, turned small failures into systemic collapse. …

    Those experiences are now seared onto the conscience of regulators. Systemic risk has entered their lexicon, and to understand that risk, they readily acknowledge the need to join the dots across the network. So far, so good. Still lacking are the data and models necessary to turn this good intent into action.

… Other disciplines have cut a dash in their complex network mapping over the past generation, assisted by increases in data-capture and modelling capability made possible by technology. One such is weather forecasting … .

   Success stories can also be told about utility grids and transport networks, the web, social networks, global supply chains and perhaps the most complex web of all, the brain.

    …  imagine the scene a generation hence. There is a single nerve centre for global finance. Inside, a map of financial flows is being drawn in real time. The world’s regulatory forecasters sit monitoring the financial world, perhaps even broadcasting it to the world’s media.

    National regulators may only be interested in a quite narrow subset of the data for the institutions for which they have responsibility. These data could be part of, or distinct from, the global architecture.

    …  it would enable “what-if?” simulations to be run – if UK bank Northern Rock is the first domino, what will be the next?”


I am unconvinced that archeology, weather forecasting or the other examples are really as complex as economic forecasting, which can be reflexive: if all the media forecast a crash there probably will be one, irrespective of the ‘objective’ financial and economic conditions. Similarly, prior to the crisis most people seemed to believe in ‘the great moderation’, and the good times rolled on, seemingly.

Prior to the crisis I was aware that a minority of British economists were concerned about the resilience of the global financial system and that the ‘great moderation’ was a cross between a house of cards and a pyramid selling scheme. In their view, a global financial crisis precipitated by a US crisis was the greatest threat to our security. In so far as I could understand their concerns, Keynes’ mathematical work on uncertainty together with his later work on economics seemed to be key.

Events in 2007 were worrying. I was advised that the Chinese were thinking more sensibly about these issues, and I took to opportunity to visit China in Easter 2008, hosted by the Chinese Young Persons Tourist Group, presumably not noted for their financial and economic acumen. It was very apparent from a coach ride from Beijing to the Great Wall that their program of building new towns and moving peasants in was on hold. The reason given by the Tour Guide was that the US financial system was expected to crash after their Olympics, leading to a slow-down in their economic growth, which needed to be above 8% or else they faced civil unrest. Once tipped off, similar measures to mitigate a crisis were apparent almost everywhere. I also talked to a financier, and had some great discussions about Keynes and his colleagues, and the implications for the crash. In the event the crisis seems to have been triggered by other causes, but Keynes conceptual framework still seemed relevant.

The above only went to reinforce my prejudice:

  • Not only is uncertainty important, but one needs to understand its ramifications as least as well as Keynes did (e.g. in his Treatise and ‘Economic Consequences of the Peace’).
  • Building on this, concepts such as risk need to be understood to their fullest extent, not reduced to numbers.
  • The quotes above are indicative of the need for a holistic approach. Whatever variety one prefers, I do think that this cannot be avoided.
  • The quote about national regulators only having a narrow interest seems remarkably reductionist. I would think that they would all need a broad interest and to be exchanging data and views, albeit they may only have narrow responsibilities. Financial storms can spread around the world quicker than meteorological ones.
  • The – perhaps implicit – notion of only monitoring financial ‘flows’ seems ludicrous. I knew that the US was bound to fail eventually, but it was only by observing changes in migration that I realised it was imminent. Actually, I might have drawn the same conclusion from observing changes in financial regulation in China, but that still was not a ‘financial flow’. I did previously draw similar conclusions talking to people who were speculating on ‘buy to let’, thinking it a sure-thing.
  • Interactions between agents and architectures are important, but if Keynes was right then what really matters are changes to ‘the rules of the games’. The end of the Olympics was not just a change in ‘flows’ but a potential game-changer.
  • Often it is difficult to predict what will trigger a crisis, but one can observe when the situation is ripe for one. To draw an analogy with forest fires, one can’t predict when someone will drop a bottle or a lit cigarette, but one can observe when the tinder has built up and is dry.

It thus seems to me that while Andy Haldane is insightful, the actual article is not that enlightening, and invites a much too prosaic view of forecasting. Even if we think that Keynes was wrong I am fairly sure that we need to develop language and concepts in which we can have a discussion of the issues, even if only ‘Knightian uncertainty’. The big problem that I had prior to the crisis was the lack of a possibility of such a discussion. If we are to learn anything from the crisis it is surely that such discussions are essential. The article could be a good start.

See Also

The short long. On the trend to short-termism.

Control rights (and wrongs). On the imbalance between incentives and risks in banking.

Risk Off. A behaviorist’ view of risk. It notes that prior to the crash ‘risk was under-priced’.

  Dave Marsay