Financial Entanglement and Complexity Theory. An Adumbration on Financial Crisis.

The complex system approach in finance could be described through the concept of entanglement. The concept of entanglement bears the same features as a definition of a complex system given by a group of physicists working in a field of finance (Stanley et al,). As they defined it – in a complex system all depends upon everything. Just as in the complex system the notion of entanglement is a statement acknowledging interdependence of all the counterparties in financial markets including financial and non-financial corporations, the government and the central bank. How to identify entanglement empirically? Stanley H.E. et al formulated the process of scientific study in finance as a search for patterns. Such a search, going on under the auspices of “econophysics”, could exemplify a thorough analysis of a complex and unstructured assemblage of actual data being finalized in the discovery and experimental validation of an appropriate pattern. On the other side of a spectrum, some patterns underlying the actual processes might be discovered due to synthesizing a vast amount of historical and anecdotal information by applying appropriate reasoning and logical deliberations. The Austrian School of Economic Thought which, in its extreme form, rejects application of any formalized systems, or modeling of any kind, could be viewed as an example. A logical question follows out this comparison: Does there exist any intermediate way of searching for regular patters in finance and economics?

Importantly, patterns could be discovered by developing rather simple models of money and debt interrelationships. Debt cycles were studied extensively by many schools of economic thought (Shiller, Robert J._ Akerlof, George A – Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism). The modern financial system worked by spreading risk, promoting economic efficiency and providing cheap capital. It had been formed during the years as bull markets in shares and bonds originated in the early 1990s. These markets were propelled by abundance of money, falling interest rates and new information technology. Financial markets, by combining debt and derivatives, could originate and distribute huge quantities of risky structurized products and sell them to different investors. Meanwhile, financial sector debt, only a tenth of the size of non-financial-sector debt in 1980, became half as big by the beginning of the credit crunch in 2007. As liquidity grew, banks could buy more assets, borrow more against them, and enjoy their value rose. By 2007 financial services were making 40% of America’s corporate profits while employing only 5% of its private sector workers. Thanks to cheap money, banks could have taken on more debt and, by designing complex structurized products, they were able to make their investment more profitable and risky. Securitization facilitating the emergence of the “shadow banking” system foments, simultaneously, bubbles on different segments of a global financial market.

Yet over the past decade this system, or a big part of it, began to lose touch with its ultimate purpose: to reallocate deficit resources in accordance with the social priorities. Instead of writing, managing and trading claims on future cashflows for the rest of the economy, finance became increasingly a game for fees and speculation. Due to disastrously lax regulation, investment banks did not lay aside enough capital in case something went wrong, and, as the crisis began in the middle of 2007, credit markets started to freeze up. Qualitatively, after the spectacular Lehman Brothers disaster in September 2008, laminar flows of financial activity came to an end. Banks began to suffer losses on their holdings of toxic securities and were reluctant to lend to one another that led to shortages of funding system. This only intensified in late 2007 when Nothern Rock, a British mortgage lender, experienced a bank run that started in the money markets. All of a sudden, liquidity became in a short supply, debt was unwound, and investors were forced to sell and write down the assets. For several years, up to now, the market counterparties no longer trust each other. As Walter Bagehot, an authority on bank runs, once wrote:

Every banker knows that if he has to prove that he is worth of credit, however good may be his arguments, in fact his credit is gone.

In an entangled financial system, his axiom should be stretched out to the whole market. And it means, precisely, financial meltdown or the crisis. The most fascinating feature of the post-crisis era on financial markets was the continuation of a ubiquitous liquidity expansion. To fight the market squeeze, all the major central banks have greatly expanded their balance sheets. The latter rose, roughly, from about 10 percent to 25-30 percent of GDP for the appropriate economies. For several years after the credit crunch 2007-09, central banks bought trillions of dollars of toxic and government debts thus increasing, without any precedent in modern history, money issuance. Paradoxically, this enormous credit expansion, though accelerating for several years, has been accompanied by a stagnating and depressed real economy. Yet, until now, central bankers are worried with downside risks and threats of price deflation, mainly. Otherwise, a hectic financial activity that is going on along unbounded credit expansion could be transformed by herding into autocatalytic process that, if being subject to accumulation of a new debt, might drive the entire system at a total collapse. From a financial point of view, this systemic collapse appears to be a natural result of unbounded credit expansion which is ‘supported’ with the zero real resources. Since the wealth of investors, as a whole, becomes nothing but the ‘fool’s gold’, financial process becomes a singular one, and the entire system collapses. In particular, three phases of investors’ behavior – hedge finance, speculation, and the Ponzi game, could be easily identified as a sequence of sub-cycles that unwound ultimately in the total collapse.

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Metric Space of Ontic Points has a Completion

To build geometric space let us introduce point-like constructs.

Ontic point: Let ξ ⊂ Θ be a family of things. We say that ξ is a complete family of united things if it satisfies:

1. Any two things of ξ are united.

2. For anything x̸ ∉ ξ there is a thing y ∈ ξ separated of x.

Now we define a distance between ontic points

Distance between ontic points:  The distance between ontic points is:

d_G(ξ,η) = sup_(i,j) d(x_i, y_j), where i ∈ I , j ∈ J belong to the respective index sets.

Theorem (Metricity): The set of ontic points is a metric space with distance d_G.

Proof: The first three distance conditions are satisfied because d is a pseudo-metric. To show that the fourth is satisfied observe that if ξ ≠ η, there are x_i≀y_j and d(x_i, y_j) > 0. So we find

ξ ≠ η ⇒ d_G(ξ, η) > 0

d_G(ξ, η) > 0 ⇒ ξ = η

The isometric completion theorem guarantees that the metric space of ontic points has a completion. This justifies the definition of Geometric space: The completion of ontic space is the geometric space E_G.

Meillassoux, Deleuze, and the Ordinal Relation Un-Grounding Hyper-Chaos. Thought of the Day 41.0

As Heidegger demonstrates in Kant and the Problem of Metaphysics, Kant limits the metaphysical hypostatization of the logical possibility of the absolute by subordinating the latter to a domain of real possibility circumscribed by reason’s relation to sensibility. In this way he turns the necessary temporal becoming of sensible intuition into the sufficient reason of the possible. Instead, the anti-Heideggerian thrust of Meillassoux’s intellectual intuition is that it absolutizes the a priori realm of pure logical possibility and disconnects the domain of mathematical intelligibility from sensibility. (Ray Brassier’s The Enigma of Realism: Robin Mackay – Collapse_ Philosophical Research and Development. Speculative Realism.) Hence the chaotic structure of his absolute time: Anything is possible. Whereas real possibility is bound to correlation and temporal becoming, logical possibility is bound only by non-contradiction. It is a pure or absolute possibility that points to a radical diachronicity of thinking and being: we can think of being without thought, but not of thought without being.

Deleuze clearly situates himself in the camp when he argues with Kant and Heidegger that time as pure auto-affection (folding) is the transcendental structure of thought. Whatever exists, in all its contingency, is grounded by the first two syntheses of time and ungrounded by the third, disjunctive synthesis in the implacable difference between past and future. For Deleuze, it is precisely the eternal return of the ordinal relation between what exists and what may exist that destroys necessity and guarantees contingency. As a transcendental empiricist, he thus agrees with the limitation of logical possibility to real possibility. On the one hand, he thus also agrees with Hume and Meillassoux that [r]eality is not the result of the laws which govern it. The law of entropy or degradation in thermodynamics, for example, is unveiled as nihilistic by Nietzsche s eternal return, since it is based on a transcendental illusion in which difference [of temperature] is the sufficient reason of change only to the extent that the change tends to negate difference. On the other hand, Meillassoux’s absolute capacity-to-be-other relative to the given (Quentin Meillassoux, Ray Brassier, Alain Badiou – After finitude: an essay on the necessity of contingency) falls away in the face of what is actual here and now. This is because although Meillassoux s hyper-chaos may be like time, it also contains a tendency to undermine or even reject the significance of time. Thus one may wonder with Jon Roffe (Time_and_Ground_A_Critique_of_Meillassou) how time, as the sheer possibility of any future or different state of affairs, can provide the (non-)ground for the realization of this state of affairs in actuality. The problem is less that Meillassoux’s contingency is highly improbable than that his ontology includes no account of actual processes of transformation or development. As Peter Hallward (Levi Bryant, Nick Srnicek and Graham Harman (editors) – The Speculative Turn: Continental Materialism and Realism) has noted, the abstract logical possibility of change is an empty and indeterminate postulate, completely abstracted from all experience and worldly or material affairs. For this reason, the difference between Deleuze and Meillassoux seems to come down to what is more important (rather than what is more originary): the ordinal sequences of sensible intuition or the logical lack of reason.

But for Deleuze time as the creatio ex nihilo of pure possibility is not just irrelevant in relation to real processes of chaosmosis, which are both chaotic and probabilistic, molecular and molar. Rather, because it puts the Principle of Sufficient Reason as principle of difference out of real action it is either meaningless with respecting to the real or it can only have a negative or limitative function. This is why Deleuze replaces the possible/real opposition with that of virtual/actual. Whereas conditions of possibility always relate asymmetrically and hierarchically to any real situation, the virtual as sufficient reason is no less real than the actual since it is first of all its unconditioned or unformed potential of becoming-other.