It’s said that there are a thousand ways to skin a cat (though why anyone would even think of doing that is a complete oddity to me). The more apt aphorism would be some blind men and an elephant in a place called Hindustan (somewhere in the Hindus valley astride India, Pakistan and Afghanistan – a not too irrelevant site, as it turns out).

What it says is that there are many ways to view any reality, each of which reflects only attributes that the viewer sees (or wants to see). For months (even years) many commentators and writers have been warning about the forthcoming financial crash (”the Coming Crash of 1979″ “The Great Depression Redux 2005” etc).

A few seem to have hit pretty close to a crisis or two; others were vaguely correct on the general direction though quite wrong on the mechanics. But a great many shared a common genre - nay, a prognosis - that this coming crash was retribution for some moral failing. Some were even dead sure of the cause - greed on the part of Americans (and capitalism in general). Truly those blind Hindustanis knew a thing or two about elephants!

Well, now that the outlines of a bailout seems to have emerged (although the outcome still hangs in balance), one can look at this episode from another perspective and with greater objectivity, to see whether all this hand wringing amounts to little more than morality plays on the part of economic dilettantes and market dabblers who should instead be focusing on a more disturbing and uglier phenomenon – chaotic system dynamics which now appears to increasingly characterize global events.

Shouldn’t they be asking how the world could learn the right lessons from what could ultimately turn out to be a providential crisis?

First Large-Scale Conflict Between Paradigms

To put it starkly, the world is now engaged in its first true, large-scale conflict between reigning (but receding) paradigms, and ascendant ones based on the notion of complexity. In fairness, much of this “synthesizing” is old hat, lying behind every crisis or panic that has occurred since the world entered the commercial age. But in its modern form it first earned notoriety during the bank panics of post-Revolutionary United States era, peaking in viciousness during the 30s Depression.

Unfortunately for dialecticians this conflict is not about ideology; instead it is about systemic stuff that thinkers like Bell, Fuller, Toffler, Drucker, Kahn, Arthur and a host of other futurologists had been warning about for decades, but which a world still accustomed to thinking in anachronistic ideological terms, had somehow disregarded. Now the wages of neglect are coming home to roost, but with greater virulence.

For a host of reasons this contagion germinates easier in the financial markets, but it can also be triggered by disruptions in climate patterns, natural calamities, plate tectonic upheavals, environmental disasters, energy, food and raw material shortages, epidemics, biological warfare, even by an event no longer as rare as once thought, an asteroid slamming down on Earth. With its essential features being large scale, very high speed and pervasive, the specific impulse matters less than the response evoked.

Based on the response to the current crisis, when it comes to events that are this complex, fast moving and widespread, it is clear that society hasn’t figured out how best to anticipate, understand, diagnose and cope effectively. This is why shoddy analyses in vogue today not only misses the point, but even more dangerously, hampers the search for the right solutions.

With help from 20/20 hindsight, let us then revisit the present crisis, with a mind less inclined towards moralizing and assigning blame and more towards understanding the complexities of financial system dynamics. If there is one event that can be benchmarked as having started it all, it was the onset of globalization, more specifically the sudden rise of export powerhouses like China (and other NICs) and the Petrodollar bloc, which were all amassing currency reserves at rates without historical precedence.

Because most of these are economies with limited capital absorption capacities, or even just low abilities to sterilize the rapidly accumulating currencies, the inevitable result was a huge savings pool that found its way into the global financial markets.

This novel phenomenon would be the first in a long chain of globalization-driven and technology-enabled processes whose implications few understood then – at least initially, until its nastiness became manifest in the currency crises triggered by bond traders massively transferring liquidity at the mere tap of a key, regardless of economic consequences.

This event, which continued without let-up dating from the first oil price hikes of the mid 70s and is still occurring with today’s massive run ups in commodities prices, supplied the impetus to a parallel yet far more deadly process – financial innovations facilitated by the same computer technologies, but now made imperative by risk management and by the search for higher yields, following across the board reductions in returns on financial assets caused by the same liquidity glut.

In the US case, the reduction in interest rates began for economic (stimulus) initially, but pressures from savers to park funds, for lack of viable investment alternatives, jived with domestic debt objectives to satisfy the symbiotic needs of all the players. In retrospect, this imbalance in the distribution of global liquidity is the primordial cause of the stresses that put the markets at risk. Talk about backdrops that explain, this event which nobody truly understood, is IT. The rest is mere detail.

The “Perfect Storm”

In what could only be described as the “perfect storm,” all the above market-stressing events occurred when economic orthodoxies were themselves undergoing profound challenge. The fall of the Berlin Wall, the breakup of the former Iron Curtain and the rise of new, inexperienced nations inspired uncritical adoption of market economy practices despite a deficiency in vital infrastructures and key institutions.

The consensus that emerged – the wholesale abolition of barriers to trade and financial flows, triggered the last wave of mitigating forces, again largely unforeseen, if not misunderstood. At this point all that was needed was the crucible where these forces could come to a head. When the student is ready, it is said, the teacher appears; in this case, with all orchestra pieces ready, the conductor was summoned to begin the concert.

America, land of risk takers

America – the land of risk takers, innovators, free- spirited individualism, seedbed of unrestrained materialism and developed financial infrastructure – provided the stage. The 1980s era Reagan Revolution of liberalized markets and deregulation provided the philosophical backdrop that lowered the guardrails against the excesses that markets unfailingly exact on the weak, indecisive, and unwary. America itself was split into two contending camps, both jousting for power in a bid to recast the country according to their ideological views.

Seizing every opportunity to push their liberal agenda, Democrats did not spare even the sensitive financial sector from legislation that coerced government- sponsored institutions to liberalize lending and credit in a radical bid to give greater access to housing for minorities and credit impaired low income groups (in exchange for political leverage and financial largesse, what else). Many Americans, already enjoying the world’s highest home ownership rates and used to living high on debt, then exploited their newly found financial empowerment and went on a house buying binge, facilitated in no small part by populist and class-inspired tax laws that incentivized high leverage.

For their part, Republicans worked to relentlessly pare down government, relaxing regulations and cutting back staff for essential reforms at precisely the juncture when those were needed by the growing financial challenges. Neither did it help that oversight and leadership were spread thinly and distracted by a global war against terror.

Media failed in its primordial task

It was at this point when the media failed in its primordial task; instead of exercising its natural role of honest broker and fiscalizer, it jumped into the fray and itself became a water boy for liberal leftist causes. After all it was easier to spout euphemisms and slogans than to pore over manuals and crack abstruse, strange equations. But in so doing media lost its moral ascendancy; even more important, it squandered objectivity and credibility necessary to espouse corrective measures.

Amidst partisan carping from all players, media to exercise impartial restraints was nowhere. So the already stressed out markets became more volatile and short-term oriented, poised to snapback at the first whiff of economic reversal. That came when the housing boom slumped midway during the decade, after which it reversed course; by 2006 the die was cast. The cold logic of systems took over.

All the subsequent events are mere footnotes to what happens when self-organizing systems reach their tipping points and the parts lose their linkages to one another, and especially to the whole. To say that at that point, all the systems relationships got frayed is to put it lightly; a more accurate word is “unhinged” as in, no longer “predictably normal.” In systems dynamics terms, crucial boundary conditions are said to have reset, even disappeared, so that attributing particular outcomes to familiar cause-effect relationships amount to ludicrous efforts that degenerate into mere exercises in futility.

Market participants themselves – starting from the Federal Reserve, the banks, all the way down to the last trader – got caught up in complex asymmetric processes (otherwise predictable with full confidence during normal times), realizing how little control they had over these processes. Reducing interest rates to stimulate spending did not work; lowering reserve requirements, offering to buy securities, liberalizing the discount window, even infusing liquidity to bolster banks’ balance sheets, buying up bad inventory to unclog traders’ books - none of these worked.

At that point, problems are said to have become “systematized”; little can be done from within that system, and only an extraneous force can “re-tip” it back to its initial conditions. This is the state of affairs as it stands; identifying this point is crucial.

En route there, the cause-effect connections were still straightforward: first the mortgage markets seized, causing asset prices to plunge. The ensuing flight to quality transmitted the stress to non-mortgage assets (ordinary bank loans and securities such as ARS). With underlying assets no longer price-stable, the overnight markets on which financial institutions normally draw their operating capital also dried up, compounding the already capital-impaired position of even stronger institutions.

When the latter (initially non-deposit taking institutions but lately even banks) proved incapable of meeting margin calls, the derivative markets collapsed, severely compromising the institutions that insured such contracts. In the absence of any guaranteeing entities or clearing houses to stand behind them, the collapse of the humongous (several trillion dollars worth) unregistered credit default swaps market represents the apex of the superstructure of claims erected atop the worthless ones.

When that stage is reached, the financial system, or indeed any complex system for that matter, becomes pretty much unsalvageable. This is why the political-business establishment is scrambling to keep the system from keeling down to this angle. But it is also why amateur commentators and pseudo analysts have to be careful of what they write. Having lost the moral high ground to pontificate, they also lack essential understanding to instruct, let alone lead. Worst of all they have no viable alternative to offer. The time is past for talking; one either does or steps aside.

Blame Game in a Complex Situation

Still, let us indulge in the most favored but useless and also dangerous activity - blaming greed on specific participants on the assumption that doing so at this stage of the crisis still makes sense. System dynamics experts point out that it is precisely in vulnerable environments where the basest of human instincts inflict havoc, if only because there are no longer restraints. Tools otherwise useful get abused precisely because they exist, not because some fiend causes folks to do it.

In this crisis, it went from accounting manipulations to governance transgressions — from compromised compliance rules to conflicted credit agencies ratings, to insurers issuing guarantees on borderline rated assets, to mortgage brokers cramming down unserviceable loans on clueless house buyers, to derivatives traders pushing bad papers on unsophisticated investors. For those who are aware, these are not total slam dunk processes while they were happening; their path-interdependent nature is such that some critical input would still have to arrive before they can tilt one way or the other.

Such is the nature of these things that outcomes that seemed to be unarguably bad in hindsight were borderline events at best, because normally functioning markets are able to deal with occasional outliers or even behavioral anomalies. Valuations, which today seem so clearly egregious (“inflated intentionally” is a favorite description), were not so at all before markets tanked.

To pretend that one has the expertise to anticipate all these potential aberrations would require not only perfect understanding of how markets work (especially past their tipping points), but more dauntingly, to predict precisely how men behave under all conceivable circumstances.

That is a heroic assumption, to say the least, less with respect to the second (a given) but even with respect to the first. This is why chaotic systems are so difficult to second guess (honestly) except “after things have already happened” (dishonestly). This is why it happened when it happened.

To cite two examples illustrating the vacuousness of this perfect vision claim, making just one minor tweak in the “mark-to-market” rules that financial regulators have unwittingly imposed on banks could have eliminated a good chunk of the artificial pressure that triggered this crisis. For the more financially literate, implied option volatility at the heart of the valuation of financial instruments is an extremely imponderable variable, dependent on the weighted probability assessments of an amorphous mass of individuals, each on their own idiosyncratic.

If this variable had behaved as it usually does under normal market conditions, the “manipulative” valuations that novices rue would have been more tractable, knocking the legs off this crisis before it walked. But years of partisan wrangling and skewed media analyses have contributed to its erratic behavior, which ought to humble and give pause to all Monday morning quarter backers.

These are but fairly simple examples; more complex examples can be cited that are even more unpredictable, if only due to latent discontinuities and asymmetries inherent in financial variables even during normal conditions. They are stuff that stump even professionals on a good day; they are as vulnerable to errors and mistakes as anybody else on a bad day. And this is just talking of financial relationships that have become unhinged; what more of the fuzzy relationships outside the financial markets?

How about starting with value-laden concepts like “fairness” and “reckless”? Why not throw in “greed” while we’re at it? If only to pursue the syllogism to its conclusion, what about blaming life itself for getting messed up now and then? Then one sees that for each negative, there is a corresponding positive; even heavily nuanced notions like “greed” turn out to have unintended consequences (such as living in a relatively comfortable modern society), so the least that sincere pontificators can do would be to offer a real alternative’ otherwise it will be all talk, grandiloquent but cheap.

If the best one can come up is Putinist gangster fascism or Chinese party-directed market socialism, free enterprise capitalism – warts and all - will end up far and away superior despite its moral objectivity, because of the capacity to right its errors. Try doing that in those other countries and see where it could lead the reformer.

Succumbing therefore to the temptation of pinning blame for such a humongous and complicated failure – by asserting that a rule, a regulator, a financial guru, a market tactician, an economist or sometimes incredibly a politician (no matter the level of expertise) could have called the shots when markets were functioning properly, but also even after they has gone bonkers – is to engage in breathtaking dishonesty. It is the height (or depth) of arrogance to profess that one knows with full certainty what single event, relationship, institution and most of all one person, let alone combinations of them, can take the blame for this crisis.

But all the more does such a heroic claim fail as one imputes this tangled outcome to a moral belief, philosophy or ideology – each of them being arbitrarily small slices of a bewildering reality like the Hindustani elephant – whose boundaries are even less cogent, fuzzier and more tenuous. There is a lot of blame to go around, even if doing so counts for nothing.

Greed itself, nebulous at best when things are straightforward, becomes even less tractable under the chain of interlocked processes we have described. Who then is greedy - the Chinese, the oil sheiks, the Arabs, Democrats, Republicans, media, buyers of houses, the speculators in real estate, the raters, the insurers, the bankers, the Fed? Which is why blaming this crisis on the “finance types,” who are just the mules, last mile runners, the bag holders and chair breakers in this mad Trip to Jerusalem, is ludicrous at best.

It follows that characterizing this crisis as specifically caused by a failure of deregulation and the free markets is only a tad less appalling. Using such extravagant language to describe this crisis betrays not just loose mastery of basic financial knowledge but total ignorance of complex systems dynamics. More simply it indicates overreaching for grandiose concepts and ideas to indulge passions while obscuring the inadequacy. As with most anything in a world of constraints, one can’t have it many ways.

Back to the world of systems, even worse is that blame itself serves no purpose in chaotic circumstances. Blaming only wastes efforts and eradicates good will, both of which a dysfunctional system badly needs, lest it keel over to the point where inaction can no longer be viewed as a real option. Past that point, self-organizing markets no longer listen to reason, not even to economists’ rational expectations.

If two weeks after invading Georgia, Russian equities markets could lose $400 billion, what the markets can exact from the world as a whole should the US fail to regain its confidence, would be anybody’s guess. But it’s likely that economic (not just market) losses totaling several tens of trillion dollars and global unemployment in the tens of millions would be trivial outcomes. In that event, the global economy would be truly at risk – here loose lips (and careless pens) can sink far more than ships; they can destroy the underpinnings of civilized society, no less. What a costly Pyrrhic victory to pay for so much abstract nonsense.

However the US and the world resolve this crisis, they still won’t go far until the really hard lessons of aberrant systems are learned. As has been argued, no other country except the US possessed the exact combination of circumstances - resources, financial infrastructure, investment viability, absorptive capacity, grit, even down to the dysfunctional divisions, at the moment when the world was besieged by globalization and technology.

The US as World Guinea Pig

If for nothing else, the US should be admired for taking on the role of guinea pig in an experiment whose burdens have now defaulted on it, because no other country (or even groups of them) had the fortitude to deal with its ugliness. Can one imagine a European Union, a China, even a UK, least of all a Russia – all rich nations in their own rights, who amidst the creeping danger to the whole world still cling selfishly to their resources, barely letting the world on to their own systemic fragilities – as being prepared, not to say willing, to accept this challenge?

Talk about a greedy people calmly donating treasure to see the world through another round of costly emergencies, as they did during the Ruble crisis, the Tequila crisis, the Asian crisis. Perhaps, instead of condemning Americans and gloating about their woes, which partly indulged the world for lack of any alternative, the world should actually be thanking them for doing most of the heavy lifting, not to say footing the enormous costs of figuring out the right answers. Try asking the world to pitch in and the familiar response would be: “Why us, were we responsible for this mess?”

One can be sure that the media will accept that foolishness because it has impaired its judgment. What a fitting irony that this complex bailout should complete the chain of events whose meaning most people perceived or welcomed. Instead of facing its ugliness squarely, most people prefer to hurl brickbats, perhaps as a defensive reaction to feelings of powerlessness tinged with envy. Luckily there is still a just God who knows exactly who to blame (but just not the media).

Because no matter how Americans (and the world) resolve this crisis, the one reality is that chaos and instability are here to stay; the best that this bailout does is temporarily buy normality until final reckoning comes. More likely the present crisis is but a prelude to the peak complexity that underlies, and will eventually overwhelm the human mind in the run-up to destruction of the universe (that’s right, Virginia, this crisis too shall pass, but only to move on to a worse one).

The astrophysicist Tipler, using very sophisticated quantum mechanics models (which is what ultimately underlies all crises) has already made rough calculations showing that perhaps the universe as we know it, has at best a few decades to last. It may not be very comforting that the Mayans have even fixed the date for it down pat – Dec. 21, 2012 - last time I visited the place it was serenely quiet so they must have known a thing or two about this crisis. One way to look at it is that man still has four years or so to enjoy an exciting roller coaster ride! Why not make the most of it?

Victor Ricasio teaches financial engineering and financial institutions in New York. This article was first posted in his blog.