There’s a nice report out of the NY Federal Reserve on Shadow Banking. That’s the ability of the great sloshing global pool of money to act as a world bank, without any safety net. I wrote an apparently effective note, got a nice response from the author.

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Dear NY Fed

A comment on your July 2010 report.  Shadow banking is an emergent natural system.  I’m a natural systems scientist who studies the difference between scientific theories and complex natural systems.

Equations can’t have independently learning parts, for example, but economies and other natural systems rely heavily on the adaptive processes of their parts. So, that adds to the long list of reasons for why abstract theories tend to have a short “shelf life”, you could say.

I’ve written on various aspects of the financial dilemma we face, from a natural systems point of view, helped by the fact that in some of Keynes’ otherwise discredited thought experiments, he did as well. There really are solutions, but they all need to pass through the gate of seeing what the real problem is. You can sort through my related writings most easily using a search of my site for mentions of Keynes [site:synapse9.com Keynes].

To see the problem one needs to “put theory aside”, because it has to do with one of a fundamental ways reality is different from theory. Subjects that would conflict with theory just upset people otherwise.

What I rely on is finding people that are open minded in that way, willing to put theory aside, and willing to try to find their own independent confirmation for things that anyone could know for themselves. I think natural language is full of complex systems understandings to let us do that. After all, language arose to help us cope with living within the complex systems of the natural world, and all our words come from referring to its complex relationships.

So, if you can put theory aside, I think the hidden problem is that we are treating the passive services of money saved in the past as being owed ever multiplying returns in the future. Conceptual worlds can do that fairly easily, but the problem is that physical systems can’t.

Physical systems have scales of organization that become unable to be responsive to multiplying demands. We do still live in a physical world, though, despite our delight in representing things with concepts…

I’d be happy to follow up with you, of course. I have a new research paper on how to anticipate when natural systems will upset our theories, that goes right to the point, Models Learning Change, (PDF). When you anticipate change, the first thing you check is how much time do you have to learn how.

Thanks for your work, Phil