How the fate of the US economy rests on a Dell workstation

The global economy is teetering on the brink of disaster.

So, you might think the quants and smart-alecs of the financial industry would have a giant supercomputer humming away somewhere, processing zillions of what-if scenarios per second and sucking in all manner of real-time economic data from the global markets and government bureaucracies to crunch some numbers and plot a logical set of economic policies to clean up this mess they got us into. No?

After hearing a report on National Public Radio's Morning Edition program describing a computerised economic model created by one-time Princeton University economic professor and present Federal Reserve chairman Ben Bernanke, called the Financial Accelerator, I certainly got the impression that the United States government had some pretty hefty simulations at its disposal to try to figure out what happened to the economy and how to fix it.

Bernanke, in case you have been hiding under a rock (a sensible course of action, really), is an expert on the economic and political forces that caused the Great Depression.

Sim Wall St

Given his expertise and the fact that Bernanke and his then colleague, New York University economics professor Mark Gertler, came up with the equations way back in the 1980s to simulate portions of the US economy as it deals with a credit crunch, you would think we would have a much more sophisticated set of tools at the disposal of the Federal Reserve. I certainly got that impression from the NPR report, which you can take a gander at here in its text version.

You might think that this massive $700bn bailout of the US financial services industry at least had some simulations backing up its numbers - particularly because we live in a world where we can view the weather live from satellites, and gather an enormous amount of physical data about air and water and land that can be put into simulations that can tell us with at least some accuracy what the weather will be like anywhere on the planet within a few hours.

Uncle Sam has dedicated several petaflops of computing power to redesigning nuclear war heads and simulating nuclear explosions (thereby getting around the Nuclear Test Ban Treaty, which forbids actually blowing up a real new nuke design to test it). You'd think at least one central bank (most likely the Federal Reserve Bank, given the central nature of the US economy since the end of World War II) would have a supercomputer cranking through scenarios right now. After all, the big banks and brokerages are doing Monte Carlo simulations to assess the risks of buying and selling securities using more or less real-time stock data.

This seems like a reasonable assumption, right? Right.

So I contacted Gertler to try to get some kind of understanding about how the Financial Accelerator model works, and what supercomputer it is implemented on. The acceleration that the model is talking about is how a credit crunch, caused by a crisis in confidence in some aspect of the economy, builds on itself and accelerates a decline. (You can read a 1996 paper put together by Bernanke, Gertler and their partner, professor Simon Gilchrist of Boston University, called The Financial Accelerator and the Flight to Quality here (pdf), and an interesting follow-up speech by Bernanke given in June 2007 called The Financial Accelerator and the Credit Channel here (pdf).)

Like the rest of you, I wanted to know what the model was saying giving the current conditions in the US stock, credit, and jobs markets.

I was able to reach Gertler by email. "Things are pretty hectic for me this week," he explained. An understatement of comic proportions had this not been such a serious bit of business.