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Don't blame computers

blame humans

April 27, 2013|By TIM ROWLAND

Economist Paul Krugman has questioned whether the economic malaise of the last five years could correctly be labeled as “the Excel Depression.”

The short version of this theory is that a spreadsheet coding error led a couple of respected economists to inaccurately conclude that there is a threshold at which growing public debt will take down an economy.

Subsequent economists discovered the bug and ran the data again and discovered that this so-called tipping point in fact does not exist.

But the damage had been done — the initial report was used to justify Europe’s (and to some degree the United States’) austerity programs, and the results of cutting public funding during economic downturns are there for all to see.

Of course, this theory somewhat ignores what got the world into a financial crisis in the first place. But it does raise an interesting point.

Many is the horror film in which machines are ingrained with human intelligence and set off to destroy the world. These machines generally take humanoid form, because it makes for a better film.Machines, however, do not need arms and legs to create havoc.

This week, hackers commandeered the Associated Press’ Twitter feed and sent out a false alert that President Obama had been injured in a White House explosion.

Don’t weep for anyone who believes anything he reads on Twitter. But do take notice that the stock market briefly plunged on the “news,” after computers, unschooled in the fine art of practical jokes, automatically dumped $200 billion worth of share value.

A human trader might have heard the rumor, switched on the news and discovered the truth before doing anything rash. But Wall Street computers prowl news and social media feeds in search of unsettling words and sell upon, for example, detecting the words White House and explosion in the same sentence.

The problem isn’t that machines don’t yet have human intelligence; the problem is that they do, and in many cases that advantage isn’t worth much. Where investing is concerned, humans and machines all too often work in concert to get dumber.

A year ago, JPMorgan Chase was racking up $6.2 billion in losses, the result of bad logic and bad computer programming. (All you need to know about the tone deafness of Wall Street is that Chase later earned a PR award for its slick handling of the crisis.)

Several months later, computers at Knight Capital — a high-frequency, algorithmic trader — went on a rogue buying spree of something called Wizzard Software Corp., a stock that it later had to dump at a $440 million loss.

And before that, in 2010, either a trader error or an overwhelmed computer system on Wall Street caused a 1,000-point freefall in 16 minutes (prompting runaway, auto-sell programs that triggered each other in turn) that panicked the financial world.

And, of course, the recent financial crisis itself was caused by computer programmers who had not been clued in to the fact that their own investment banks had been dressing up cancerous subprime mortgage derivatives in Triple A-rating costumes.

It wasn’t even the subprime mortgages themselves that were fatal. It was the fact that for every $1 in mortgage money, Wall Street had $50 in side bets on the outcome of those mortgages. Investment banks peddled bonds as sound investments to gullible clients, then turned around and placed large bets that the bonds would tank.

Unfortunately for them, the outfits from which they bought the insurance were just as shady, and when the bonds did indeed fail, it turned out the insurers didn’t have the cash in hand to pay for the losses.

In fact, no one had the money. All this gambling was taking place with borrowed funds, because the banks had lobbied Washington to eliminate meaningful limits on how much risk they could take on with borrowed money.

And when Wall Street didn’t have the cash to cover, it was, of course, the rest of us little people who had to pay the bill.

What this means to the small investor should be pretty clear. The stock market as we have known it is all but gone. The merit of a particular company is lost in the howling hurricanes of automated transactions, dishonest hedge fund managers and computer models that can sink the entire market (and our life savings) with a single “glitch.”

Maybe this is the logical outcome of capitalism in a computerized world. Or maybe it’s time to reassess how Wall Street operates before we all are dragged down to nothing by a computer — programmed by dumb and/or greedy humans — that was only doing its job.

Tim Rowland is a Herald-Mail columnist. His email address is timr@herald-mail.com.

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