What a day! Stocks in US tanked almost 10% across the board  for no reason. Greek issues were mentioned, but in fact Greek parliament passed belt tightening bills, so it was positive news. Later we found that it was a mistake, someone sold billions instead of millions of shares (or futures) and Procter& Gamble was mentioned as the company that was sold and fell more than 20%, Accenture was another company that took a beating. Then there were computer programs and automated trading, exactly as on Black Tuesday in 1987.

Ok, now comes the tricky part. How come a broker mistake leads to near 10% collapse of US stocks, which then leads to 10% collapse in CAC40 futures, and to 11% collapse in Nikkei250 futures. I know that we have a global economy, but there is something inherently wrong with the way financial markets function. Beacuse it is so similar to Black Tuesday, one should ask a person behind the Black Tuesday collapse. Richard Bookstaber, who spent 40 years as risk manager on Wall Street and who invented portfolio insurance which caused Black Tuesday wrote a book “A Deamon of our own design” that explains what went wrong. In short, we need to reduce leverage, simplify financial instruments and install circuit breakers.

So far record low interest rates encourage leverage, politicians plan more regulations which means even more complicated financial products, and as we saw today circuit breakers do not exist. So as a former central banker I have this little suggestion to my colleagues central bankers and regulators. Stop Basle 2 1/2 pep talk, stop repeating the same mistakes over and over again. Read Richard Bookstaber book. And European politicians should get necessary reforms on fast track, especially in PIIGS countries, but elsewhere as well.

I was invited to deliver an opening speech at the international symposium “European Research on the Move”. The title of my speech is “Development strategies: a matter of choice”. The Symposium “is devoted to the debate on expected changes in science organization and financing, mutual relationship between  national and international research policies, the issue of modern scientific research infrastructures in Europe and the institutions at which research takes place, particularly universities. Also the interplay between basic science and technological innovations, as well as potential applications will be discussed“.

I am planning to open with the following:

“European Union is in the state of war. It is a war that has begun a decade ago, new battlefields open almost every day and our armies are in retreat in most battles, on earth, in the air and in the deep waters. Our enemies mobilized unprecedented resources, their armies outnumber the Union forces, hundreds of thousands of new, well trained recruits join the enemies forces each year, while the Union pool of talent able to survive and launch a victorious strike seems more shallow than ever. Our enemies have well targeted strategy, to make their countries prosper and to deprive our children and grandchildren from their prosperous future. Our enemies follow their strategy with a great determination while we still focus on tactics, winning a battle here or there, without a grand strategy to guide us. The Union is plagued by angst and impossibilism, Union leadership is scarse, weak or non-existent, Union army morale has never been worse.

Take a look at the following link , it describes a giant mortgage fraud scheme that led to the current financial crisis. Financial market regulators did not notice. The only regulator in the world that took action, to my knowledge, was Banking Supervision Committee which made it more difficult for Polish citizens to borrow in Swiss franks to buy houses, in anticipation of possible troubles-bubbles ahead. This decision definitely helped Poland to become star performer in the current crisis.

So what these failed regulators do these days. They consult with zombie bankers to come up with better regulation, which is likely to lead to a dead end. The best book on the financial crisis that I have read so far was Richard Bookstaber “Demon of our own design”. Richard was one of the key players behind the 1987 Black Tuesday Crash, his team created and made popular portfolio insurance. The book explains why more regulation will create more complex system and crashes will be even more likely.

We need change. In 21st century of internet we need  to employ the crowdsourcing technique to prevent crises. The above link shows how the giant Madoff scheme developed in mortgages, that many people knew it was fraud, but there were no mechanisms, no incentives to reveal this information and to prevent from turning into worst crisis in a century.

Instead of new regulation, more complicated one, that is bound to fail again, we need to make sure that inside information about fraud gets to proper people, to regulators, and that there are proper incentives to act on this information.

Take a look around you. There could be Madoff schemes brewing in every country. Those who have such information and fail to act are as guilty, as those who create such schemes.

Mobile phones are very useful. They even save lives, as people in danger can more easily contact the emergency. We all use mobile phones.

However, a recent paper by Vini G. Khurana, a well know brain-tumor specialist warns, that heavy use of mobile phones may increase the likelihood of a brain tumor, especially among youth and children. As brain tumor develops over a 10-20 year period, in 2008-2012 we will have long-enough track record of using mobile phones to observe sharply rising rates of brain tumors. Doctor Khurana calls for immediate global action.

I am an economist and know nothing about brain tumors,  so it is very hard to determine the quality of presented medical results without seeing the details of statistical models that were used. It is certain that cars will continue to kill more people than mobile phones in the foreseeable future, but when your mother-in-law calls next time you can shorten the conversation by mentioning Dr Khurana study

I thought I would draw your attention to this Wal-Mart innovation. I tend to watch Wal-Mart not only because it is the world biggest private employer, but because its client-driven innovation apporach is so important, that it can even be seen in the US macro data (check conference board van Ark papers on the sources of US productivity growth, you may find them on my blog resources).

This time around Wal-Mart encouraged its merchandise buyers to blog freely (no editing by management) about goods they buy to be sold in Wal-Mart stores. See NYT article.

I do believe that knowledge sharing does create a new value. Not only customers can find out what is assessed as good value for money, but also suppliers anticipating that blog will expose them to fair judgment may strive for quality. I think that it is not for every company. If some Peanut Electronics Store did the same, and wrote something unpleasant about Vista, it would be boxing above their weight for sure. But if large suppliers develop this culture of transparency (fair opinion is welcome from big guys as well as from small guys) it could work in favor of consumer as well as producer.

Collective wisdom is very powerful. I think that Wal-Mart blog may act also as innovation platform, when people start commenting on products and these comments/suggestions are later used by producers/suppliers to make better products.  Feedback is king.

The future of internet is shaped today, and with the Microsoft takeover of Yahoo! it is gaining a new speed. Two giants: Microsoft and Google have already exchanged very hostile blog posts, see:

Google attacking Microsoft monopoly culture and Microsoft response saying that Google itself is a monopoly.

Get ready, the ball is rolling.

• NYT article on XO laptop launch in November, with amazing features costing only $200. Quote:

“

In November, you’ll be able to buy a new laptop that’s spillproof, rainproof, dustproof and drop-proof. It’s fanless, it’s silent and it weighs 3.2 pounds. One battery charge will power six hours of heavy activity, or 24 hours of reading. The laptop has a built-in video camera, microphone, memory-card slot, graphics tablet, game-pad controllers and a screen that rotates into a tablet configuration.”

Interesting. In Poland some telecoms are offering laptop for 1 PLN (50 cents) but you have to use their services. Well, in 3rd world countries you will have to pay famous 100 bucks  for a computer, in more developed countries you get it for free, like cell phones

• Guardian article on UK government plan to fund innovation, a quote:

“The government today pledged to spend £1bn over the next three years promoting scientific and technological innovation by British business and industry.

Accepting a review of UK science by the former science minister Lord Sainsbury, the Chancellor Alistair Darling said the transfer of scientific knowledge into the private sector had improved but needed to be stepped up if the country was to remain competitive.

I have seen many white swans in my life, I even fed many of them as Poland is nature-abundant country and swans like to live here. But I have never seen a black swan. I was told they exist, I was even shown pictures, but I have never seen one.

In financial markets black swan is a symbol of a very low likelihood and very high impact event, such as internet bubble crash, Septemeber 11, Asia crisis etc. It is usually thought of as a negative event, for example black swan could “bring” subprime market crash, or black swan could be a collapse of a big hedge fund.

But black swans could be symbols of rapid positive changes too. Take a look at the recent John Mauldin outside the box story about positive disruptive technology that will create the first ever city 2.0. Another example would be an invention that will replace oil as car fuel at lower cost. It will happen one day, it may have already happened.

Let me know what you think about John Mauldin’s story.

Newsweek has an intresting article on IPOD generation, IPOD stands for “Insecure, Pressured, Overtaxed and Debt-Ridden”. I does raise three important issues that young generation will face, that I would call a triple whammy. (1) large taxes to pay for debt burden generated by old generation (due to large official public debt and implicit pension liabilities). (2) high property prices, which makes it more diffcult for young people to start adult life on their own; (3) low wages amid emergence of global labor market and Freeman Great Doubling of the labor force after CEE, China and India joined the global labor pool. Young generation tries to defend itself, is more flexible, more mobile, better educated. Will this be enough, or are we facing the great threat of global-scale intergenerational conflict. Today legislative controlled by old generation passes laws favoring old people, but voters age composition is slowly changing. I have just turned forty, but my advice to young generation is this: make sure that your country allows voting via internet (follow Estonia example) and then vote to defend your interests.