Oct

3

The WSJ has an interesting article titled 'The Body as Bacterial Landlord'  discussing the Nobel winning finding that it is not stress that causes stomach ulcers but the bacteria Helicobacter Pylori. Widespread use of antibiotics did lead to a significant decline in the ulcer rate but there seems to be a whole bunch of unintended negative consequences. These include increased rates of allergies, eczma, hay fever, gastric reflux and esophageal cancer. Microbiologist Dr Blaser suggests that in our eager efforts to stay clear of bacteria we may be forgoing the various protections they have provided us over hundred of thousands of years of evolution. The article emphases the idea of a co-evolution with these little critters and that we may need to adjust our mindset of viewing bacteria as harmful. On a positive note, research in this area seems to be flourishing and it will be interesting to see what we learn in the years ahead. The article concludes with: "They live with us, and they are part of us," says Dr. Chervonsky. "That does not mean there is no tug of war.".

When I read this I couldn't help thinking about the financial markets and wider economy as a similarly complex system and how recent measures by governments, particularly the ban on short selling, is the sledgehammer equivalent of the application of antibiotics in that it severely hinders a tug-of-war co-existence that has a long run benefit to the system itself. As for the the unintended consequences, off the top of my head: in the UK, the nationalised bank Northern Rock has experienced the opposite of a bank run as depositors rush to a bank fully backed by the government; Ireland has a 100% guarantee on deposits, and this risks an escalation of protective measures through the world as money heads to where it is most safe; why should banks lend to each other when they can get risk-free funding from the seemingly endless billions that are being pumped into the overnight markets by the central banks (I'm not surprised the TED spread is where it is with this kind of distortion); when the Fed announces massive bailout programme, the banks must surely be incentivised to stop trying to fix the problem themselves (raise capital, face the pain, etc) as they know a massive buyer is about to come to the market. It's a complex system and we are fudging our way through by swinging sledgehammers in every direction. I know something has to be done, but I don't like what I see.


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