Financial Crisis: A Question of Information Overload?

The breakdown of the nation’s financial industry plus recent events in financial markets worldwide have made me wonder about the role of information overload in the current financial crisis.  Headlines have made it painfully clear that financial institutions were unsure of their assets and liabilities.  Usually, this would be attributed to an inadequacy of available information but that’s far from the case here.

The Panic of 1907, a financial crisis in the U.S. during which the stock market fell almost 50%, was accompanied by a recession and numerous runs on banks.  Bank panics were not unusual at the time; the Panic of 1907 was the fourth to occur in 34 years.  [It's hard to compare recent bank failures, of which there have been 14 this year and only three last year, with the thousands of bank failures at the onset of the Great Depression.  Today's banks have far more customers and accounts than those much smaller banks.  As of today, JPMorgan Chase has more than $2 trillion in assets and is the largest depository bank in the U.S.  By comparison, Citibank has a mere $1.3 trillion in assets.]

Unlike the bankers of today, who cannot give clear and comprehensible explanations of their assets because their instruments are so complex they themselves do not understand them fully, the bankers who visited the home of J.P. Morgan in 1907, which had become a revolving door of New York City bank and trust company presidents as he attempted to stave off a complete collapse of financial markets, were able to present everything about their banks’ financial conditions on simple balance sheets that did not require pages of footnotes.

The financial markets have become far more sophisticated in the past decade; ever notice just how many screens a typical trader works with?  L. Gordon Crovitz recently pointed out in the Wall Street Journal that better and more complete information was available in 1907;  the workflow device for traders then was a “simple pencil and scrap paper” but that’s all they needed.

The point is simple enough: rather than too little, we have far too much information today and that impedes our decision-making abilities and throttles our ability to resolve crises.  While Information Overload is certainly not a direct cause of the current travails, it nonetheless is playing a key suppporting role.

Jonathan B. Spira is CEO and Chief Analyst at Basex.

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