Saturday, June 13
Computers "also played a role in the earlier real estate collapse of 2008"
"Even heads of large banks could not determine the viability of their own institutions."
The reliance on computers by financial markets goes well beyond systems responsible for high-frequency trading. They also played a role in the earlier real estate collapse of 2008.
Computers enabled the assembly of complex derivatives that bundled bad loans together with good loans. Once the real estate market collapsed, it became impossible for anyone to evaluate the worth of the derivative shares held by banks.
Even heads of large banks could not determine the viability of their own institutions. What is interesting about the role of computers in the derivative crisis is that the machines did not fail. They functioned as critical infrastructure supporting a faulty banking system. Yet their very existence enabled the creation of the complex derivative market that helped cause the crisis, and certainly exacerbated its impact.From the sobering book "A Dangerous Master: How to Keep Technology from Slipping Beyond Our Control" by Wendell Wallach (Basic Books, Copyright June 2, 2015). See the Business Insider for more excerpts.