The Global Regulatory Consequences of an Irrational Crisis: Examining 'Animal Spirits' and 'Excessive Exuberances'

• Published in: Globalizations 2010-03, Vol.7 (1-2), p.87-103
• Main Author: Thompson, Grahame F.
• Format: Article
• Language: English
• Subjects: Animals; CDOs; Decision Making; derivatives; Economic Models; financial crisis; Financial systems; global regulation; Intellectuals; International Economic Organizations; Irrationality; Market; Markets; natural disaster planning; Natural Disasters; options pricing; Radicalism; Regulation; Risk; risk assessment
• ISSN: 1474-7731; 1474-774X
• DOI: 10.1080/14747731003593257

What does it mean to describe the financial system as 'irrational'? And what would be the global regulatory implications and consequences for the financial system if it were thoroughly 'irrational'? These are the issues pursued in this article. The article sets out to explore the nature of both the financial system and the economic models deployed to price the main products that are traded in the system, like options, derivatives and collateralized debt obligations (CDOs). The underlying assumptions associated with these economic models are examined and the failure of the markets to track risks assessed. The article moves on to review several alternative and radical theoretical approaches that draw attention to the nature of the potential irrationality of markets and decision making in the financial sphere, like 'excessive exuberances' and 'animal spirits'. Finally, the article assesses the consequences of this kind of analysis for regulation. A key claim is that the financial system might be more profitably considered as one that works in a similar way as do natural disasters like earthquakes, tsunamis, or volcanoes. Natural disaster planning is thus an intellectual resource that needs to be brought into play to manage and regulate the financial system. This is linked directly to the issue of 'irrationality' considered in its existential forms as highlighted by the radical philosophical literature reviewed earlier. Thus a completely new and different framework for considering financial regulation is suggested in contrast to the current emphasis on rational top down initiatives emanating from a global calculating centre like the BIS, the IMF's Financial Stability Forum or the G-20. ¿Qué significa la descripción del sistema financiero como 'irracional'? ¿Y cuáles serían las implicaciones regulatorias y las consecuencias para el sistema financiero si fuera completamente 'irracional'? Estas son los problemas que estudia este artículo. El artículo parte de la exploración de la naturaleza tanto del sistema financiero como de los modelos económicos implementados para poner el precio a los productos principales que se negocian en el sistema, como las opciones, derivados y las obligaciones de deuda colaterales (CDOs, por sus siglas en inglés). Se examinan las suposiciones subyacentes asociadas con esos modelos económicos y se evalúa el fracaso de los mercados para rastrear los riesgos. El artículo continúa revisando varias alternativas y métodos teóricos radicales