2012 38th Annual Conference of the Eastern Community College Social Science Association (ECCSSA) Center for Innovative Technology 2214 Rock Hill Road Herndon VA ldquoThe Great Renewal Rebuilding Our NationmdashVisions and Challengesrdquo March 30 2012 Presenters Dipak K (Dee) Roy and Ian Taylor

1Theory both ldquorepresentative agentrdquo (RA) ndashbased and DSGE models ignore adaptive interactions of a variety of actors in networks that lead to crisis Big weakness Treats colds not serious illnesses (Stiglitz) 2 Policy complex systems science may provide essential insight about economic outcomes--better guidance and tools for regulation (eg mapping of financial networks)

Why is Economics not an Evolutionary Science Thorstein Veblen The Quarterly Journal of Economics vol 12 1898 On the individual in economic theory ldquoHe is an isolated definitive human datum in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or anotherrdquo On the reality ldquoThe economic life history of the individual

is a cumulative process of adaptation of means to ends that cumulatively change as the process goes onhelliprdquo

Classical economics is a ldquotaxonomicrdquo discipline not an evolutionary one

Assumption of ldquoconstrained optimization by representative agentsrdquo ignores the adaptive and historical nature of economic relationships processes and their consequences (Foster 2004)

Standard macro models do not consider the

networked aspects of lending and global banking

(Gallegati Stiglitz 2011)

ldquoEconomic theory based on the RA model has in short nothing to say about financial crises bankruptcies dominorsquos (sic) effects systemic risk and any pathology in generalrdquo Heterogeneous Interacting Agent Models for Understanding Monetary Economies Joseph E Stiglitz and Mauro Gallegati Eastern Economic Journal 2011 37 (6ndash12)

ldquo The era of globalization is the era of connectedness This reality represents an increasingly troubling challenge to traditional theories and models of social systems which assume the independence of individuals from their broader social milieurdquo httpwwwiqharvardedublognetgov

1Theory both ldquorepresentative agentrdquo (RA) ndashbased and DSGE models ignore adaptive interactions of a variety of actors in networks that lead to crisis Big weakness Treats colds not serious illnesses (Stiglitz) 2 Policy complex systems science may provide essential insight about economic outcomes--better guidance and tools for regulation (eg mapping of financial networks)

Why is Economics not an Evolutionary Science Thorstein Veblen The Quarterly Journal of Economics vol 12 1898 On the individual in economic theory ldquoHe is an isolated definitive human datum in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or anotherrdquo On the reality ldquoThe economic life history of the individual

is a cumulative process of adaptation of means to ends that cumulatively change as the process goes onhelliprdquo

Classical economics is a ldquotaxonomicrdquo discipline not an evolutionary one

Assumption of ldquoconstrained optimization by representative agentsrdquo ignores the adaptive and historical nature of economic relationships processes and their consequences (Foster 2004)

Standard macro models do not consider the

networked aspects of lending and global banking

(Gallegati Stiglitz 2011)

ldquoEconomic theory based on the RA model has in short nothing to say about financial crises bankruptcies dominorsquos (sic) effects systemic risk and any pathology in generalrdquo Heterogeneous Interacting Agent Models for Understanding Monetary Economies Joseph E Stiglitz and Mauro Gallegati Eastern Economic Journal 2011 37 (6ndash12)

ldquo The era of globalization is the era of connectedness This reality represents an increasingly troubling challenge to traditional theories and models of social systems which assume the independence of individuals from their broader social milieurdquo httpwwwiqharvardedublognetgov

Why is Economics not an Evolutionary Science Thorstein Veblen The Quarterly Journal of Economics vol 12 1898 On the individual in economic theory ldquoHe is an isolated definitive human datum in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or anotherrdquo On the reality ldquoThe economic life history of the individual

is a cumulative process of adaptation of means to ends that cumulatively change as the process goes onhelliprdquo

Classical economics is a ldquotaxonomicrdquo discipline not an evolutionary one

Assumption of ldquoconstrained optimization by representative agentsrdquo ignores the adaptive and historical nature of economic relationships processes and their consequences (Foster 2004)

Standard macro models do not consider the

networked aspects of lending and global banking

(Gallegati Stiglitz 2011)

ldquoEconomic theory based on the RA model has in short nothing to say about financial crises bankruptcies dominorsquos (sic) effects systemic risk and any pathology in generalrdquo Heterogeneous Interacting Agent Models for Understanding Monetary Economies Joseph E Stiglitz and Mauro Gallegati Eastern Economic Journal 2011 37 (6ndash12)

ldquo The era of globalization is the era of connectedness This reality represents an increasingly troubling challenge to traditional theories and models of social systems which assume the independence of individuals from their broader social milieurdquo httpwwwiqharvardedublognetgov

Assumption of ldquoconstrained optimization by representative agentsrdquo ignores the adaptive and historical nature of economic relationships processes and their consequences (Foster 2004)

Standard macro models do not consider the

networked aspects of lending and global banking

(Gallegati Stiglitz 2011)

ldquoEconomic theory based on the RA model has in short nothing to say about financial crises bankruptcies dominorsquos (sic) effects systemic risk and any pathology in generalrdquo Heterogeneous Interacting Agent Models for Understanding Monetary Economies Joseph E Stiglitz and Mauro Gallegati Eastern Economic Journal 2011 37 (6ndash12)

ldquo The era of globalization is the era of connectedness This reality represents an increasingly troubling challenge to traditional theories and models of social systems which assume the independence of individuals from their broader social milieurdquo httpwwwiqharvardedublognetgov

ldquoEconomic theory based on the RA model has in short nothing to say about financial crises bankruptcies dominorsquos (sic) effects systemic risk and any pathology in generalrdquo Heterogeneous Interacting Agent Models for Understanding Monetary Economies Joseph E Stiglitz and Mauro Gallegati Eastern Economic Journal 2011 37 (6ndash12)

ldquo The era of globalization is the era of connectedness This reality represents an increasingly troubling challenge to traditional theories and models of social systems which assume the independence of individuals from their broader social milieurdquo httpwwwiqharvardedublognetgov

ldquo The era of globalization is the era of connectedness This reality represents an increasingly troubling challenge to traditional theories and models of social systems which assume the independence of individuals from their broader social milieurdquo httpwwwiqharvardedublognetgov

ldquoIn physics you are playing against God and he doesnrsquot change his laws very often In finance you are playing against Godrsquos creaturesrdquo --Emanuel Derman engineering professor Columbia Univ Models Behaving Badly Why Confusing Illusion with Reality Can Lead to Disaster on Wall Street and in Life Free Press 2011

Why is Economics not a Complex Systems Science John Foster Discussion Paper No336 December 2004 School of Economics The University of Queensland httpwww2econiastateedutesfatsimacrocasfosterpdf

Why is Economics not a Complex Systems Science John Foster Discussion Paper No336 December 2004 School of Economics The University of Queensland httpwww2econiastateedutesfatsimacrocasfosterpdf

published 2010 Jackson is prof of economics at Stanford U

Lucid and comprehensive Jacksons book elegantly synthesizes several important strands of network science from sociology physics mathematics computer science and economics It will be an immensely useful reference for researchers and students alike--Duncan Watts Columbia University

Systemic Risk Tipping Point Contagion Derivatives Firewall Too Big to Fail Too Interconnected to Fail

NETWORK

THEORY

Financial

Network

Analysis

Biological

Network

Analysis

Graph amp Matrix

Theory

Social Network

Analysis

Network

Science

Computer

Science

Complex Systems Science network theory and related fields The end of narrow disciplines an academic revolutionhellip (source Kimmo Soramaki 2011)

Recent financial crisis brought to light the need to look at links between financial institutions

Networks are a natural way to visualize the financial system lsquoNetwork thinkingrsquo widespread by regulators Mapping of the financial system

has only begun

Eratosthenes map of the known world c194 BC

ldquoToo big to failrdquo

ldquoToo interconnected to failrdquo

+

Source Keble College Oxford U httpwwwkebleoxacukacademicsadvanced-studies-centre-1networks

Systemic Risk Tipping Point Contagion Derivatives Firewall Too Big to Fail Too Interconnected to Fail

NETWORK

THEORY

Financial

Network

Analysis

Biological

Network

Analysis

Graph amp Matrix

Theory

Social Network

Analysis

Network

Science

Computer

Science

Complex Systems Science network theory and related fields The end of narrow disciplines an academic revolutionhellip (source Kimmo Soramaki 2011)

Recent financial crisis brought to light the need to look at links between financial institutions

Networks are a natural way to visualize the financial system lsquoNetwork thinkingrsquo widespread by regulators Mapping of the financial system

has only begun

Eratosthenes map of the known world c194 BC

ldquoToo big to failrdquo

ldquoToo interconnected to failrdquo

+

Source Keble College Oxford U httpwwwkebleoxacukacademicsadvanced-studies-centre-1networks

NETWORK

THEORY

Financial

Network

Analysis

Biological

Network

Analysis

Graph amp Matrix

Theory

Social Network

Analysis

Network

Science

Computer

Science

Complex Systems Science network theory and related fields The end of narrow disciplines an academic revolutionhellip (source Kimmo Soramaki 2011)

Recent financial crisis brought to light the need to look at links between financial institutions

Networks are a natural way to visualize the financial system lsquoNetwork thinkingrsquo widespread by regulators Mapping of the financial system

has only begun

Eratosthenes map of the known world c194 BC

ldquoToo big to failrdquo

ldquoToo interconnected to failrdquo

+

Source Keble College Oxford U httpwwwkebleoxacukacademicsadvanced-studies-centre-1networks

Recent financial crisis brought to light the need to look at links between financial institutions

Networks are a natural way to visualize the financial system lsquoNetwork thinkingrsquo widespread by regulators Mapping of the financial system

has only begun

Eratosthenes map of the known world c194 BC

ldquoToo big to failrdquo

ldquoToo interconnected to failrdquo

+

Source Keble College Oxford U httpwwwkebleoxacukacademicsadvanced-studies-centre-1networks

ldquoToo big to failrdquo

ldquoToo interconnected to failrdquo

+

Source Keble College Oxford U httpwwwkebleoxacukacademicsadvanced-studies-centre-1networks

Source Keble College Oxford U httpwwwkebleoxacukacademicsadvanced-studies-centre-1networks

ldquohellipinterdependencies across different systems and markets are potentially more important for financial stability than interdependencies within the system This is the case because these types of links have the potential to dramatically change the behaviour of market participantsrdquo --European Central Bank (ECB) ldquoRecent advances in modelling systemic risk using network analysisrdquo January 2010 (p 25)

ldquoWithin a certain range connections serve as a shock-absorber The system acts as a mutual insurance device with disturbances dispersed and dissipated Connectivity engenders robustness Risk-sharing ndash diversification ndash prevails But beyond a certain range the system can flip the wrong side of the knife-edge Interconnections serve as shock-amplifiers not dampeners as losses cascaderdquo

His 2009 speech may be a real watershed widely cited since thenhellip

PBS Frontline TV show ldquoThe Warningrdquo October 2009

--The inability of Brooksley Born (head of CFTC) to regulate derivatives during the Clinton years Shut down by Alan Greenspan and Robert Rubin through Congress --Clinton also deregulated the banking system by repealing the Glass-Steagall Act in 1999 (had separated commercial from investment banking) Disasterhellip httpwwwpbsorgwgbhpagesfrontlineshowswallstreetweilldemisehtml

ldquoWithin a certain range connections serve as a shock-absorber The system acts as a mutual insurance device with disturbances dispersed and dissipated Connectivity engenders robustness Risk-sharing ndash diversification ndash prevails But beyond a certain range the system can flip the wrong side of the knife-edge Interconnections serve as shock-amplifiers not dampeners as losses cascaderdquo

His 2009 speech may be a real watershed widely cited since thenhellip

PBS Frontline TV show ldquoThe Warningrdquo October 2009

--The inability of Brooksley Born (head of CFTC) to regulate derivatives during the Clinton years Shut down by Alan Greenspan and Robert Rubin through Congress --Clinton also deregulated the banking system by repealing the Glass-Steagall Act in 1999 (had separated commercial from investment banking) Disasterhellip httpwwwpbsorgwgbhpagesfrontlineshowswallstreetweilldemisehtml

His 2009 speech may be a real watershed widely cited since thenhellip

PBS Frontline TV show ldquoThe Warningrdquo October 2009

--The inability of Brooksley Born (head of CFTC) to regulate derivatives during the Clinton years Shut down by Alan Greenspan and Robert Rubin through Congress --Clinton also deregulated the banking system by repealing the Glass-Steagall Act in 1999 (had separated commercial from investment banking) Disasterhellip httpwwwpbsorgwgbhpagesfrontlineshowswallstreetweilldemisehtml

PBS Frontline TV show ldquoThe Warningrdquo October 2009

--The inability of Brooksley Born (head of CFTC) to regulate derivatives during the Clinton years Shut down by Alan Greenspan and Robert Rubin through Congress --Clinton also deregulated the banking system by repealing the Glass-Steagall Act in 1999 (had separated commercial from investment banking) Disasterhellip httpwwwpbsorgwgbhpagesfrontlineshowswallstreetweilldemisehtml

ldquoGlobal financial markets act as complex scale free evolving networks that possess key characteristics requiring network management if they are to function with stabilityrdquo FinancialCrisis and Global GovernanceA Network Analysis AndrewSheng 2010 Working Paper no 67 Commission on Growth and Devevopment httpwwwgrowthcommissionorgstoragecgdevdocumentsgc

wp067webpdf

1 Financial networks now spread contagion much like

a disease epidemic (Stiglitz 2010)

2 Public health epidemics are stopped through quarantine

3 In finance similar policy needed capital controls (circuit breakers)

Stiglitz loss of economic welfare much less from regulation and controls than from weathering a global financial crisishellip

Columbia U professor Nobel laureate 2001 econ Author ldquoGlobalization and its Discontentsrdquo Former Chmn CEA World Bank chief economist

Columbia U professor Nobel laureate 2001 econ Author ldquoGlobalization and its Discontentsrdquo Former Chmn CEA World Bank chief economist

--IRGC ndash Emerging risks Helbing Oct 2010

Rethinking Macroeconomics What Failed and How to Repair It Journal of the European Economic Association 9(4) pp591-645 2010 Risk and Global Economic Architecture Why Full Financial Integration May Be Undesirable Speech Aug 15 2010 Atlanta Ga httpwww2gsbcolumbiaedufacultyjstiglitzdownloadpapers2010_Risk_Global_Architecturepdf

Rethinking Macroeconomics What Failed and How to Repair It Journal of the European Economic Association 9(4) pp591-645 2010 Risk and Global Economic Architecture Why Full Financial Integration May Be Undesirable Speech Aug 15 2010 Atlanta Ga httpwww2gsbcolumbiaedufacultyjstiglitzdownloadpapers2010_Risk_Global_Architecturepdf

ldquoWith fluctuations in the supply of credit being at the center of many economic fluctuations a theory that has little to say about credit and its determinants is obviously of limited userdquo --standard models assume shocks are exogenous Stiglitz indicates that they are now often man-made endogenous ldquothe sub-prime mortgage crisis was man-maderdquo (p 596 Rethinking Macroeconomics)

ldquohellipStandard Models focusing on money not credit where banks and security markets were not well analyzed provided little guidance on how government could restore the flow of credit Thatmdashnot interest ratesmdashwas the central issuerdquo (p609) RETHINKING MACROECONOMICS WHAT FAILED AND HOW TO REPAIR IT Joseph Stiglitz Journal of the European Economic Association August 2011

ldquoMacro models agree that optimal monetary policy is to keep interest rates low to avoid sectoral misallocationrdquo

Stiglitz argues otherwise puts him ironically on the same page as the Austrian economists icons of the Tea Partyists and Rep Ron Paul Thatrsquos a revolution

ldquoWhile the economic system sometimes amplifies shocks standard theory argues that economic systems do just the opposite through several mechanismsrdquo ldquoUnderstanding amplificationmdashhow small disturbances can give rise to large effectsmdashshould be one of the key objectives of macroeconomic researchrdquo ldquohellipeconomic systems (viewed as complex adaptive processes) may exhibit major phase transitionsrdquo This is where the revolution in macroeconomics is coming

ldquoDodd-Frank and the Myth of ldquoInterconnectednessrdquo by Peter J Wallison American Enterprise Institute Wall Street Journal Friday Feb 10 2012

ldquoTherersquos no evidence that exposure to Lehman imperiled other banks So why base a law on that premiserdquo (Ignores AIGderivatives-DKR)

Real separation of investment banking from commercial banking (return to simple Glass-Steagall type laws strong Volcker rules no proprietary trading by banks)

Breaking up the banks (seen as crucial by Simon Johnson MIT prof former chief economist of the IMF)

Reduce the size of financial derivative transactions and contracts outstanding There were proposals to tax them in the EU (OTC notional value is $708 trillion as of 611)

Limiting international financial network connectivity capital movements temporarily ldquocircuit breakersrdquo like in the stock market (NYSE) currently (Helbing Stiglitz)

The euro Robert Mundellrsquos theory calls for factor mobility in optimal currency areas

hellipThat includes capital mobility

Yet capital mobility may be a transmitting factor in financial networks that have by now reached a tipping pointhellip Mundell considers fixed exchange rates a stabilizing factor for global financial markets Obsolete view

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

ldquohellipStandard Models focusing on money not credit where banks and security markets were not well analyzed provided little guidance on how government could restore the flow of credit Thatmdashnot interest ratesmdashwas the central issuerdquo (p609) RETHINKING MACROECONOMICS WHAT FAILED AND HOW TO REPAIR IT Joseph Stiglitz Journal of the European Economic Association August 2011

ldquoMacro models agree that optimal monetary policy is to keep interest rates low to avoid sectoral misallocationrdquo

Stiglitz argues otherwise puts him ironically on the same page as the Austrian economists icons of the Tea Partyists and Rep Ron Paul Thatrsquos a revolution

ldquoWhile the economic system sometimes amplifies shocks standard theory argues that economic systems do just the opposite through several mechanismsrdquo ldquoUnderstanding amplificationmdashhow small disturbances can give rise to large effectsmdashshould be one of the key objectives of macroeconomic researchrdquo ldquohellipeconomic systems (viewed as complex adaptive processes) may exhibit major phase transitionsrdquo This is where the revolution in macroeconomics is coming

ldquoDodd-Frank and the Myth of ldquoInterconnectednessrdquo by Peter J Wallison American Enterprise Institute Wall Street Journal Friday Feb 10 2012

ldquoTherersquos no evidence that exposure to Lehman imperiled other banks So why base a law on that premiserdquo (Ignores AIGderivatives-DKR)

Real separation of investment banking from commercial banking (return to simple Glass-Steagall type laws strong Volcker rules no proprietary trading by banks)

Breaking up the banks (seen as crucial by Simon Johnson MIT prof former chief economist of the IMF)

Reduce the size of financial derivative transactions and contracts outstanding There were proposals to tax them in the EU (OTC notional value is $708 trillion as of 611)

Limiting international financial network connectivity capital movements temporarily ldquocircuit breakersrdquo like in the stock market (NYSE) currently (Helbing Stiglitz)

The euro Robert Mundellrsquos theory calls for factor mobility in optimal currency areas

hellipThat includes capital mobility

Yet capital mobility may be a transmitting factor in financial networks that have by now reached a tipping pointhellip Mundell considers fixed exchange rates a stabilizing factor for global financial markets Obsolete view

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

ldquoMacro models agree that optimal monetary policy is to keep interest rates low to avoid sectoral misallocationrdquo

Stiglitz argues otherwise puts him ironically on the same page as the Austrian economists icons of the Tea Partyists and Rep Ron Paul Thatrsquos a revolution

ldquoWhile the economic system sometimes amplifies shocks standard theory argues that economic systems do just the opposite through several mechanismsrdquo ldquoUnderstanding amplificationmdashhow small disturbances can give rise to large effectsmdashshould be one of the key objectives of macroeconomic researchrdquo ldquohellipeconomic systems (viewed as complex adaptive processes) may exhibit major phase transitionsrdquo This is where the revolution in macroeconomics is coming

ldquoDodd-Frank and the Myth of ldquoInterconnectednessrdquo by Peter J Wallison American Enterprise Institute Wall Street Journal Friday Feb 10 2012

ldquoTherersquos no evidence that exposure to Lehman imperiled other banks So why base a law on that premiserdquo (Ignores AIGderivatives-DKR)

Real separation of investment banking from commercial banking (return to simple Glass-Steagall type laws strong Volcker rules no proprietary trading by banks)

Breaking up the banks (seen as crucial by Simon Johnson MIT prof former chief economist of the IMF)

Reduce the size of financial derivative transactions and contracts outstanding There were proposals to tax them in the EU (OTC notional value is $708 trillion as of 611)

Limiting international financial network connectivity capital movements temporarily ldquocircuit breakersrdquo like in the stock market (NYSE) currently (Helbing Stiglitz)

The euro Robert Mundellrsquos theory calls for factor mobility in optimal currency areas

hellipThat includes capital mobility

Yet capital mobility may be a transmitting factor in financial networks that have by now reached a tipping pointhellip Mundell considers fixed exchange rates a stabilizing factor for global financial markets Obsolete view

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

ldquoWhile the economic system sometimes amplifies shocks standard theory argues that economic systems do just the opposite through several mechanismsrdquo ldquoUnderstanding amplificationmdashhow small disturbances can give rise to large effectsmdashshould be one of the key objectives of macroeconomic researchrdquo ldquohellipeconomic systems (viewed as complex adaptive processes) may exhibit major phase transitionsrdquo This is where the revolution in macroeconomics is coming

ldquoDodd-Frank and the Myth of ldquoInterconnectednessrdquo by Peter J Wallison American Enterprise Institute Wall Street Journal Friday Feb 10 2012

ldquoTherersquos no evidence that exposure to Lehman imperiled other banks So why base a law on that premiserdquo (Ignores AIGderivatives-DKR)

Real separation of investment banking from commercial banking (return to simple Glass-Steagall type laws strong Volcker rules no proprietary trading by banks)

Breaking up the banks (seen as crucial by Simon Johnson MIT prof former chief economist of the IMF)

Reduce the size of financial derivative transactions and contracts outstanding There were proposals to tax them in the EU (OTC notional value is $708 trillion as of 611)

Limiting international financial network connectivity capital movements temporarily ldquocircuit breakersrdquo like in the stock market (NYSE) currently (Helbing Stiglitz)

The euro Robert Mundellrsquos theory calls for factor mobility in optimal currency areas

hellipThat includes capital mobility

Yet capital mobility may be a transmitting factor in financial networks that have by now reached a tipping pointhellip Mundell considers fixed exchange rates a stabilizing factor for global financial markets Obsolete view

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

ldquoDodd-Frank and the Myth of ldquoInterconnectednessrdquo by Peter J Wallison American Enterprise Institute Wall Street Journal Friday Feb 10 2012

ldquoTherersquos no evidence that exposure to Lehman imperiled other banks So why base a law on that premiserdquo (Ignores AIGderivatives-DKR)

Real separation of investment banking from commercial banking (return to simple Glass-Steagall type laws strong Volcker rules no proprietary trading by banks)

Breaking up the banks (seen as crucial by Simon Johnson MIT prof former chief economist of the IMF)

Reduce the size of financial derivative transactions and contracts outstanding There were proposals to tax them in the EU (OTC notional value is $708 trillion as of 611)

Limiting international financial network connectivity capital movements temporarily ldquocircuit breakersrdquo like in the stock market (NYSE) currently (Helbing Stiglitz)

The euro Robert Mundellrsquos theory calls for factor mobility in optimal currency areas

hellipThat includes capital mobility

Yet capital mobility may be a transmitting factor in financial networks that have by now reached a tipping pointhellip Mundell considers fixed exchange rates a stabilizing factor for global financial markets Obsolete view

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

Real separation of investment banking from commercial banking (return to simple Glass-Steagall type laws strong Volcker rules no proprietary trading by banks)

Breaking up the banks (seen as crucial by Simon Johnson MIT prof former chief economist of the IMF)

Reduce the size of financial derivative transactions and contracts outstanding There were proposals to tax them in the EU (OTC notional value is $708 trillion as of 611)

Limiting international financial network connectivity capital movements temporarily ldquocircuit breakersrdquo like in the stock market (NYSE) currently (Helbing Stiglitz)

The euro Robert Mundellrsquos theory calls for factor mobility in optimal currency areas

hellipThat includes capital mobility

Yet capital mobility may be a transmitting factor in financial networks that have by now reached a tipping pointhellip Mundell considers fixed exchange rates a stabilizing factor for global financial markets Obsolete view

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

The euro Robert Mundellrsquos theory calls for factor mobility in optimal currency areas

hellipThat includes capital mobility

Yet capital mobility may be a transmitting factor in financial networks that have by now reached a tipping pointhellip Mundell considers fixed exchange rates a stabilizing factor for global financial markets Obsolete view

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

ROBERT MUNDELL

Professor Robert Mundell 1999 Nobel Laureate the father of the Theory of Optimum Currency Areas

NOBEL PRIZE 1999

A Theory of Optimal Currency Areas (1958-1961) ldquofather of the eurordquo

(proposed ldquoeuropardquo in 1969) For the Mundell-Fleming

model which integrated the domestic and international sides of an economy (1958-1961) new policy guide

Should central banks adopt a more discretionary monetary (and regulatory) policy to head off speculative bubbles

They now operate mainly with inflation

targeting rules Ben Bernanke wants to make such a rule official at the Federal Reserve (itrsquos now informal) this is opposite of discretion

Emphatic yes we already find game theory in our introductory textbooks

Important to put the 2008 and eurozone financial crises in perspective We live in a globalized society and economy

Make students aware of the emerging complex systems perspectives and tools being developed Tipping points systemic riskshellip these are central concepts now Will be in textbooks So we should be aware of these trends too

Harvard University Northwestern University (NetLogo) University of Chicago (Booth School) NYU MIT Columbia U (in sociology economics) Cornell (mathematics small world networks) The Santa Fe Institute US Military Academy Also the New York Fed There are others this is a rapidly growing list

1 Globalization means interconnectedness

2 Interconnectedness is changing economic and social relations in profound ways not well understood but easy to observe

3 Dynamic and diverse agent interactions interconnected networks and their interactions with their environment can now result in tipping points that amplify shocks which then cascade throughout the system Roles of credit and bankruptcy crucial

4 Such spreading of systemic risks require an immediate and massive fiscal and monetary policy response Free market advocates greatly underestimate these effects 5 But the economy is less responsive in terms of growth and unemployment than before Okuns Law has become unstable (In 2008 and 2009 unemployment rose faster and higher than Okuns Law would indicate but recently unemployment is falling faster than the rate real GDP growth would normally be associated with)

6 Aggressive macro policies may not be sustainable they may create instability in the global monetary and financial architecture What should they be if changes in employment are no longer as clearly linked to changes in output

7 Systemic risks continue to be large proposed and likely regulatory regimes are nowhere near as significant as during the Great Depression Derivatives continue to hang over global finance and banking is becoming even more concentrated around the world

8 Macro models need to be overhauled to make them more useful as diagnostic tools and to point to directions for policy The interaction of heterogeneous agents and credit not money and interest rates need to play a more central role Economists need to understand banking and finance Mapping of financial networks might help policymakers better understand the risk and sources of shocks

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

Emphatic yes we already find game theory in our introductory textbooks

Important to put the 2008 and eurozone financial crises in perspective We live in a globalized society and economy

Make students aware of the emerging complex systems perspectives and tools being developed Tipping points systemic riskshellip these are central concepts now Will be in textbooks So we should be aware of these trends too

Harvard University Northwestern University (NetLogo) University of Chicago (Booth School) NYU MIT Columbia U (in sociology economics) Cornell (mathematics small world networks) The Santa Fe Institute US Military Academy Also the New York Fed There are others this is a rapidly growing list

1 Globalization means interconnectedness

2 Interconnectedness is changing economic and social relations in profound ways not well understood but easy to observe

3 Dynamic and diverse agent interactions interconnected networks and their interactions with their environment can now result in tipping points that amplify shocks which then cascade throughout the system Roles of credit and bankruptcy crucial

4 Such spreading of systemic risks require an immediate and massive fiscal and monetary policy response Free market advocates greatly underestimate these effects 5 But the economy is less responsive in terms of growth and unemployment than before Okuns Law has become unstable (In 2008 and 2009 unemployment rose faster and higher than Okuns Law would indicate but recently unemployment is falling faster than the rate real GDP growth would normally be associated with)

6 Aggressive macro policies may not be sustainable they may create instability in the global monetary and financial architecture What should they be if changes in employment are no longer as clearly linked to changes in output

7 Systemic risks continue to be large proposed and likely regulatory regimes are nowhere near as significant as during the Great Depression Derivatives continue to hang over global finance and banking is becoming even more concentrated around the world

8 Macro models need to be overhauled to make them more useful as diagnostic tools and to point to directions for policy The interaction of heterogeneous agents and credit not money and interest rates need to play a more central role Economists need to understand banking and finance Mapping of financial networks might help policymakers better understand the risk and sources of shocks

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

Harvard University Northwestern University (NetLogo) University of Chicago (Booth School) NYU MIT Columbia U (in sociology economics) Cornell (mathematics small world networks) The Santa Fe Institute US Military Academy Also the New York Fed There are others this is a rapidly growing list

1 Globalization means interconnectedness

2 Interconnectedness is changing economic and social relations in profound ways not well understood but easy to observe

3 Dynamic and diverse agent interactions interconnected networks and their interactions with their environment can now result in tipping points that amplify shocks which then cascade throughout the system Roles of credit and bankruptcy crucial

4 Such spreading of systemic risks require an immediate and massive fiscal and monetary policy response Free market advocates greatly underestimate these effects 5 But the economy is less responsive in terms of growth and unemployment than before Okuns Law has become unstable (In 2008 and 2009 unemployment rose faster and higher than Okuns Law would indicate but recently unemployment is falling faster than the rate real GDP growth would normally be associated with)

6 Aggressive macro policies may not be sustainable they may create instability in the global monetary and financial architecture What should they be if changes in employment are no longer as clearly linked to changes in output

7 Systemic risks continue to be large proposed and likely regulatory regimes are nowhere near as significant as during the Great Depression Derivatives continue to hang over global finance and banking is becoming even more concentrated around the world

8 Macro models need to be overhauled to make them more useful as diagnostic tools and to point to directions for policy The interaction of heterogeneous agents and credit not money and interest rates need to play a more central role Economists need to understand banking and finance Mapping of financial networks might help policymakers better understand the risk and sources of shocks

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

1 Globalization means interconnectedness

2 Interconnectedness is changing economic and social relations in profound ways not well understood but easy to observe

3 Dynamic and diverse agent interactions interconnected networks and their interactions with their environment can now result in tipping points that amplify shocks which then cascade throughout the system Roles of credit and bankruptcy crucial

4 Such spreading of systemic risks require an immediate and massive fiscal and monetary policy response Free market advocates greatly underestimate these effects 5 But the economy is less responsive in terms of growth and unemployment than before Okuns Law has become unstable (In 2008 and 2009 unemployment rose faster and higher than Okuns Law would indicate but recently unemployment is falling faster than the rate real GDP growth would normally be associated with)

6 Aggressive macro policies may not be sustainable they may create instability in the global monetary and financial architecture What should they be if changes in employment are no longer as clearly linked to changes in output

7 Systemic risks continue to be large proposed and likely regulatory regimes are nowhere near as significant as during the Great Depression Derivatives continue to hang over global finance and banking is becoming even more concentrated around the world

8 Macro models need to be overhauled to make them more useful as diagnostic tools and to point to directions for policy The interaction of heterogeneous agents and credit not money and interest rates need to play a more central role Economists need to understand banking and finance Mapping of financial networks might help policymakers better understand the risk and sources of shocks

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

4 Such spreading of systemic risks require an immediate and massive fiscal and monetary policy response Free market advocates greatly underestimate these effects 5 But the economy is less responsive in terms of growth and unemployment than before Okuns Law has become unstable (In 2008 and 2009 unemployment rose faster and higher than Okuns Law would indicate but recently unemployment is falling faster than the rate real GDP growth would normally be associated with)

6 Aggressive macro policies may not be sustainable they may create instability in the global monetary and financial architecture What should they be if changes in employment are no longer as clearly linked to changes in output

7 Systemic risks continue to be large proposed and likely regulatory regimes are nowhere near as significant as during the Great Depression Derivatives continue to hang over global finance and banking is becoming even more concentrated around the world

8 Macro models need to be overhauled to make them more useful as diagnostic tools and to point to directions for policy The interaction of heterogeneous agents and credit not money and interest rates need to play a more central role Economists need to understand banking and finance Mapping of financial networks might help policymakers better understand the risk and sources of shocks

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

6 Aggressive macro policies may not be sustainable they may create instability in the global monetary and financial architecture What should they be if changes in employment are no longer as clearly linked to changes in output

7 Systemic risks continue to be large proposed and likely regulatory regimes are nowhere near as significant as during the Great Depression Derivatives continue to hang over global finance and banking is becoming even more concentrated around the world

8 Macro models need to be overhauled to make them more useful as diagnostic tools and to point to directions for policy The interaction of heterogeneous agents and credit not money and interest rates need to play a more central role Economists need to understand banking and finance Mapping of financial networks might help policymakers better understand the risk and sources of shocks

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

8 Macro models need to be overhauled to make them more useful as diagnostic tools and to point to directions for policy The interaction of heterogeneous agents and credit not money and interest rates need to play a more central role Economists need to understand banking and finance Mapping of financial networks might help policymakers better understand the risk and sources of shocks

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

9 Policy needs to be directed both toward the too big to fail and the too interconnected to fail problems

10 Such policies may create deadweight losses but such losses are much less than those from a phase transition and resulting global financial crisis with huge losses of wealth as seen in 20089 (Stiglitz)

11 Politics will stymie real reform until the next crisis in which case the risks of continued reliance on outmoded economic ideologies and models then aggressive monetary and fiscal measures in response to crisis will become even more clear

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

--the new science of networks (ldquomacrordquo or system-wide perspective) --dynamic agent-based systems (ldquomicrordquo or adaptive interaction of agents with environment perspective)

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

Veblen Thorstein Why Economics is Not an Evolutionary Science Quarterly Journal of Economics Vol 11 1898

Why is Economics not a Complex Systems Science John Foster Discussion Paper

No336 December 2004 School of Economics The University of Queensland

From Graph Theory to Models of Economic Networks A Tutorial Michael D Konig and Stefano Battiston 2009

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009 ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo

Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009 Financial Crisis and Global Governance A Network Analysis Andrew Sheng 2010 World Bank

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

Mapping Systemic Risk in the International Banking Network Garratt Mahadeva Svirydzenka Working Paper no 413 Bank of England Jan 2011

Scale Free Networks Albert-Laszlo Barabasi Eric Bonabea Scientific American May 2003

On Systemic Risk Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_systemic_risk Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin NatureVol 464| 15 April 2010| doi101038nature08932 Rethinking Macroeconomics What Failed and How to Repair It Joseph Stiglitz

Journal of the European Economic Association 9(4) pp591-645 2010

Heterogeneous Interacting Agent Models for Understanding Monetary Economies Stiglitz Joseph with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

From Dictatorship to Democracy 20 httpwwwisnethzchisnCurrent-AffairsSpecial-FeatureDetaillng=enampid=137747ampcontextid774=137747ampcontextid775=137746amptabid=137746 The role of social media in spreading Gene Sharprsquos 1993 handbook on non-violent resistance to authoritarian regimes in the Middle East and elsewhere Did social media networking create a tipping point throughout the region Arab Spring Revolutions Follow Game Plan from 1993 Book httpwwwyoutubecomwatchv=v5xe5KYbPTk

httpsgephiorg2011the-egyptian-revolution-on-twitter

Dynamic evolution of a network clustering

The bright side networks and their interconnections drive information transmission communication technology social trends prosperity new development models for poor countries productivity and popular democratic movements

The dark side transmit systemic economic risks and crisis hacking theft of intellectual property globalization of terror erosion of privacy and enable deeply intrusive tools of political repression

On Systemic Risk by Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_s

ystemic_risk

On Systemic Risk by Ian Goldin Oxford U SeedMagazinecom Dec 16 2010 httpseedmagazinecomcontentarticleon_s

ystemic_risk

Catastrophic cascade of failures in interdependent networks Sergey V Buldyrev Roni Parshani Gerald Paul H Eugene Stanley amp Shlomo Havlin Vol 464| 15 April 2010| doi101038nature08932 Nature April 2010 httphavlinbiuacilPSCatastrophic20cascade20of20failures20in20interdependent20networkspdf

Systemic Risks in Society and Economics Dirk Helbing 2010 Electronic address dhelbingethzch 1 ETH Zurich CLU E1 Clausiusstr 50 8092 Zurich Switzerland httpwwwsomsethzch httpwwwccssethzch

httpwwwfuturicteusitesdefaultfilesSystemic20risks20in20society20and

20economicspdf

Analyzing Systemic Risk with Financial Networks During a Financial Crash

Burak Saltoglu February 2011

Boğazici University Department of Economics

Natuk Birkan Hall Bebek Istanbul Turkey email buraksaltoglubounedutr Fax +90

212 3282688

ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009

httpwwwslidesharenetsoramakiis-network-theory-the-best-hope-for-regulating-systemic-risk-2585999

ldquoIs Network Theory the Best Hope for Regulating Systemic Riskrdquo Kimmo Soramaki European Central Bank Workshop on ldquorecent advances in modelling systemic risk using network analysisrdquo 5 October 2009

httpwwwslidesharenetsoramakiis-network-theory-the-best-hope-for-regulating-systemic-risk-2585999

ldquoRETHINKING THE FINANCIAL

NETWORKrdquo Speech by Andrew G Haldane Executive Director Financial Stability Bank of England (The UKrsquos central bank )

Speech delivered at the Financial Student Association Amsterdam

April 2009 (This is a watershed paper) - DKR) httpwwwfinextracomFinextra-

downloadsfeaturedocsspeech386pdf

ldquoFinancial Network Analyzer and Interbank Payment

Systemsrdquo Kimmo Soramaumlki Workshop 2011 West Point Military

Academy 8th April 2011

httpwwwnetscienceusmaeduworkshopsfnawest-point[1]pdf

httpwwwfinancialnetworkanalysiscom

Note that while these tools may be very useful their power may be limited by available data ldquoData from across national borders is essentialrdquo (ECB) -- DKR

Financial Network Analysis Simulation analysis and stress testing of payment networks ndash Session 1 Kimmo Soramaumlki kimmosoramakinet wwwfnafi Presentation at Payments System Oversight Course Central Bank of Bolivia La Paz 25 November 2011

Contagion and Systemic Risk in Financial Networks Amal Moussa (PhD thesis)

(Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Graduate School of Arts and Sciences COLUMBIA UNIVERSITY 2011)

Too interconnected to fail Contagion and

Systemic Risk in Financial Networks Amal Moussa and Andreea Minca PPT Presentation

httpcermicsenpcfrcnfContpdf

Contagion and Systemic Risk in Financial Networks Amal Moussa (PhD thesis)

(Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Graduate School of Arts and Sciences COLUMBIA UNIVERSITY 2011)

Too interconnected to fail Contagion and

Systemic Risk in Financial Networks Amal Moussa and Andreea Minca PPT Presentation

httpcermicsenpcfrcnfContpdf

Working Paper No 413 ldquoMapping systemic risk in the international banking networkrdquoRodney J Garratt Lavan Mahadeva and Katsiaryna Svirydzenka March 2011 httpwwwbankofenglandcoukpublicationsDocumentsworkingpaperswp413pdf --Banking system ldquosuperclustersrdquo developed The US the UK Japan and Cayman Islands later eurozone banks Their networks are intertwined

The Financial Crisis and the Systemic Failure of Academic Economics (Dahlem Report) David Colander Hans Foumlllmer Armin Haas Michael Goldberg Katarina Juselius Alan KirmanThomas Lux and Brigitte Sloth Kiel Working Paper No 1489 | February 2009

ldquoWe believe that it will be necessary for supervisory authorities to develop a perspective on the network aspects of the financial system collect appropriate data define measures of connectivity and perform macro stress testing at the system level In this way new measures of financial fragility would be obtainedrdquo

Delli Gatti Domenico Gaffeo Edoardo and Gallegati Mauro ldquoComplex Agent Based Macroeconomics a Manifesto for a New Paradigmrdquo Journal of Economic Interaction and Coordination Springer Volume 5 Number 2 111-135 DOI 101007s11403-010-0064-8 December 2010 Stiglitz Joseph Heterogeneous Interacting Agent Models for Understanding Monetary Economies with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

Delli Gatti Domenico Gaffeo Edoardo and Gallegati Mauro ldquoComplex Agent Based Macroeconomics a Manifesto for a New Paradigmrdquo Journal of Economic Interaction and Coordination Springer Volume 5 Number 2 111-135 DOI 101007s11403-010-0064-8 December 2010 Stiglitz Joseph Heterogeneous Interacting Agent Models for Understanding Monetary Economies with Mauro Gallegati Eastern Economic Journal 37 (Winter 2011) 6-12

Rethinking Macroeconomics What Failed and How to Repair It Journal of the European Economic Association 9(4) pp591-645 2010 Risk and Global Economic Architecture Why Full Financial Integration May Be Undesirable Speech Aug 15 2010 Atlanta Ga httpwww2gsbcolumbiaedufacultyjstiglitzdownloadpapers2010_Risk_Global_Architecturepdf

Education BA economics Antioch College Yellow Springs Ohio Graduate study Johns Hopkins U (SAIS) DC international relations MPA intrsquol economic policy and management Columbia University NY Career mainly international trade and business former VP Mitsubishi Intrsquol Corp

President Ascona Foods Group (Canada) Ltd graduate internship in US Treasury as economist (intrsquol affairs developing nations finance)

Lived in India Japan and Canada (19 yrs)

Adjunct instructor at NOVA Woodbridge Campus since Fall 2009

I teach ECO 201 (macro) and ECO 202 (micro) at Woodbridge