by Frank Riedel, Mathematics and Economics, Bielefeld University, Germany
The current pandemic that originated in the Chinese city of Wuhan has hit the whole world hard, and the whole world has been spectacularly unprepared for the crisis. The financial markets, whose job it is to anticipate future developments and to adapt prices according to their expectations, were caught by surprise. The Dow Jones plummeted by more than 20 %, experiencing the worst week in history in terms of percentage losses. Self-employed people and small and medium-sized businesses in the world fear insolvency. Governments and central banks are trying to bolster the economy with unprecedented spending and credits, surpassing the measures of ten years ago by a significant degree, thereby risking inflation, a currency crisis, or another debt crisis.
When this crisis is over, questions will be asked: how could we have been so stupid as to let this happen? Why did we leave the borders open? Why did we close them when it was too late? Why did we let Italy down (again)? Why did they tell us that masks are useless even though their usefulness is clear? Why did they tell us that closing schools does not make sense only to close schools a week later? These are good questions, and some politicians may have to pay for their negligence, maybe. However, it is always good to ask oneself: how would I have dealt with the possibility of a virus outbreak if I were a politician? Would I have been prepared? As it is impossible to be prepared for everything, we might ask what we can do for our markets and societies to help them through future storms.
For the second time in the twenty-first century, the world has been hit hard by a “small event”. In 2008, financial markets had been speculating for quite some time on credit risks, ignoring the possibility that many small-credit borrowers become insolvent at the same time; traders were believing in a law of large numbers that holds true for many small, independent, and statistically identical cases, yet not in situations when the many small events may be highly correlated via some common factor. Improper regulation induced even higher and higher speculation and the game went on until the unthinkable happened and the now famous “black swan” appeared on stage.
In these days, the world has been taken by surprise by another small event, a world-wide pandemic created by a virus. The possibility of such a pandemic was well known, of course. In fact, the German Government must have been aware of the possibility for quite some time, as it asked the Robert Koch Institute to carry out a study of potential consequences of a corona (!) virus pandemic in 2012. When you read the study, you cannot help but ask: why did the authorities not react on this study?Continue reading “The Robust Social Market Economy – Some Thoughts on the Corona Pandemics”