On May 6, 2010, the Dow Jones was having a bad day. Poor domestic economic news and the latest Sisyphean downhill trend of investor confidence stemming from the Greek debt crisis had dragged the average down 300 points by the afternoon. Then, at 2:42 pm, the Dow fell off a cliff, plummeting for the next five minutes into a nearly 1000 point deficit for the day. Twenty minutes later, the average had clawed its way back up about 600 points, going from bad to apocalyptic to bad again in less than a half hour of trading.
Analysts, talking heads, pundits, traders, and academics all took a step back. Did Warren Buffett just liquidate his holdings? Did China decide it didn't like US Treasury bonds anymore? No. It was computers moving shares by the millisecond, faithfully following orders to buy under some conditions and sell under others. Some fearful symmetry in the traders' bets represented in the code of dozens of servers created the perfect condition for everyone to sell. Investors' cold theories of arbitrage played out automatically, touching off a panic, alleviated only thanks to "automatic stabilizers" that halt trading for 5 seconds. This action arrested the cascading effects of the sell-off and life went on.
The point here isn't to talk about the logical intricacies of profit maximization. It's about panic. The rules that led to this crash were encoded by humans with a human understanding of the game, complete with the standard human obliviousness to other people's own understanding of the rules. People knew what they knew and it made sense to them. The problem is that they didn't know what the other guy knew. What's rational for the individual can be disastrous for all, and there are no "automatic stabilizers" to stop people from running to the exits. We need to do better.
Most of the time, the economic effects of our navel-gazing natures cancel one another out. One man's crisis is another's opportunity. We all know the cliches. Creative destruction, supply meets demand, no light without darkness, etc. But sometimes, when the signals are just right, it's all destruction. Sometimes there's no buyer for what you're selling. On rare occasions, it's dark as far as anyone can see.
The 2010 Flash Crash is a lesson we need to remember today. A bad month for unemployment, weak housing starts, and a little inflation should not induce panic. We panic when we don't want to be the last out the door, and we don't know the motivations of everyone else in the same position. A little faith in the market can be self-fulfilling. Let the news cycle work itself into a frenzy if it likes, but ignore it. Support some common-sense rules for all to obey; it might be less fun, but it will make life better for everyone involved, sort of like traffic lights.
Don't panic. Have some faith. Ignore the news; panic for you is ratings for them. Support regulation and the buying power of the American worker. Don't buy gold and keep your money in the mattress. People buy gold because cynics like Glenn Beck killed their faith in the system for a quick buck.
It does no good to believe that the world economy will collapse, and that we're all headed towards an anarchic run for the hills. If that happens, who will want your cash anyway? What good is gold when there's a gun to your head? Unless you're in a cult there really is no upside to the apocalypse, so you're better off believing that things will get better without one. The economy may be one big farce, but hey, physicists are thinking the same thing about matter and energy, yet I'm still typing away on the stuff.
Money is imaginary, yes. But out of imagination emerges real prosperity. No past civilization has come close to the standard of living most people enjoy today thanks to the fluidity of monetary policy and fiat currency. We did this on faith. A dollar means something because we all agree that it does, and the alternative was nowhere near as desirable. We all agree on what it means because we communicate with one another about what it will buy. We take this communication as truth because we trust in the law and the mutual benefit that arises out of maintaining these fantasies. Faith, communication, and trust are the basis of any human relationship more complex than a band of hunter-gatherers.
The economy will improve. There are obscene profits yet to be had, cushy office park jobs yet to be done poorly, newer, shinier products to become household essentials, blockbuster drugs, energy economies, consumer electronics, hydrogen cars, the latest tropical wonderfruit, rockets to space, Amazon Prime, health insurance, diet trends, and must-have action figures for the kids. We start with faith in these things. From there we grow.
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