Peter Cochrane's Blog: How tech can solve the banking crisis

Written on the Eurostar between Paris and London, and dispatched to silicon.com via a 3G Mobile Data Link an hour later

Like you, I have been watching the global banking fiasco with a mix of fascination and horror. Oh how the mighty have fallen, and how silly the masters of the universe now look.

And how silly the rest of us look for letting them do it in the first place - not to mention letting them get away with it for so long, and putting us all in financial jeopardy.

To cap this we then we dig into our tax pockets to bail them out at a cost that has yet to emerge. Extraordinary!

How the heck did all this happen? In a nutshell:

• A full understanding of the banking and financial system is now beyond the span of any one human mind - in a similar way the complexities of a 747 aircraft escape us too.
• Managers and executives have to rely on the people they employ being honest, ethical and sensible. They just can't dig down and watch every action and thought any more - the system is far too big, fast and complex.
• And of course the primary forces in any banking and financial institution - greed and fear!
• Oh, and we should mention those courses on creative accounting and banking - I'm sure they have a lot to answer for also!

So what happens after the great bailout? Regulation, lots of regulation - with lots and lots of committees, watchdogs and consultants. Will it work? No, it never does!

Within the next decade, and certainly within two, it will all happen again - all that will be different will be the precise mechanism by which it is affected.

In my short investment career we have had the dot-com bust; the Enron and WorldCom scandals; and now the banking sector collapse. All were fuelled by greed, fear and sublime optimism coloured by a total blindness to what was really happening and the certain outcome. Also they were characterised by the creation of false value that was seductive but flew in the face of common sense - until the entire economic fallacy imploded.

So what do we need to do? How about modelling and simulating the business and transaction models, all trades and networks including supply chains and dealer activity. We have the technology and ability to create electronic monitoring systems that could supervise the actual activity and not what is thought to be happening.

In this latest crisis the bankers and traders have been assigning huge values to toxic debts (that are likely to be worthless) which they sold on in 'attractive wrappers' and deals that created even more false value in the system. Ironically some banks were buying into these same enhanced deals months later, having lost track of the assets and the wrappers. And so moribund assets went around the system gaining in false value at each stage. But hey, it was huge profits and bonus time all year long.

Our only hope for any form of long-term stability is the creation of a machine-based economy with all the models and monitoring built-in. At a fundamental level our economic system is non-linear and chaotic, and with increased globalisation it will only get worse.

We (our species) are being rendered increasingly blind and clueless as to what is actually happening. We have no idea if the economy of our planet is conditionally stable or unstable - and a testable computational model is the only way we can find out.

Can we do all this today? Oh yes! Will we do it? I reckon not! Why? Vested interests in the old ways fuelled by fear and greed! We will probably have to endure at least one more major crisis before the political and commercial worlds figure it out and do the obvious.

Chaotic systems tend to fail in a series of crashes that get more intense and closer together with time. As far as I can see the stage is set and we are watching it happen, and we might expect another, even bigger event on the next cycle.

In the interim what will the big companies and banks do? The war cry will be: hunker down, cut back, get rid of the frills, back to basics, stick to the knitting and of course reduce staffing.

How do I know all this? I've been through it before. It's like déjà vu… again... and again…

On the other hand the really smart folks will be investing in technology, people and new market opportunities with tried and tested models.