The financial crisis raises questions about the role science can play in the analysis of policy. Here we show that crashes are related to panic, characterize the network of economic interdependence and analyze market regulations.
NECSI has begun a detailed analysis of the dynamic flow of money in the U.S. economy. Our model can begin to guide monetary and fiscal policy towards sustained economic growth.
NECSI analysis shows that while the debt crisis is real, market overreactions made it much worse by driving interest rates higher at a critical time, leading policy-makers to over-react. By quantifying the stability and vulnerability of the market, this work lays the foundation for making informed decisions about when the government should and shouldn't intervene.
Predicting Economic Crashes by Characterizing Panic
NECSI analysis reveals that it is the internal structure of the market, not external news, which can cause a market to crash. The model which describes panic in the market successfully predicted observed market crashes.
The uptick rule was designed to limit the rapid selling of borrowed shares and was implemented after the crash of 1929 to prevent future crashes. After it was repealed in the summer of 2007 due to unsound interpretations of data, the market was left more vulnerable to spikes and drops. At NECSI recommendation, the SEC announced a return of the rule, which caused an immediate market response. However, the rule has been reinstated only in a limited form, leaving the market vulnerable.