Ventana Systems proposes to form a collaborative among leading Fortune 50 corporations, US financial institutions, and federal agencies to work with Ventana to develop advanced models of the economic system. The project aims to create a better understanding and deeper insight into the drivers of economic crises and the sources for improved economic stability. The analysis includes modeling to understand better the interrelation of economic, energy, and environmental policies.
The Need for an Economic System Overhaul
The sudden advent of a worldwide financial and economic crisis followed by the dramatic deterioration in the performance of most national economies has elicited calls for rapid government responses in the forms of stimulus, recapitalization, and outright “bailouts.” These trillion-dollar “experiments” have already begun and will be followed by more as policy-makers search for a combination that reverses the current recessionary decline. Unfortunately, the classical models available to deal with such crises have been unsuccessful in the past, and they are again proving to be inadequate for the very critical tasks at hand.
Ventana Systems and its allies recognize that political pressures demand that economic stimulation and regulatory experiments take place long before their designs can be properly evaluated and tested. However, we believe that it is now crucial to start creating the predictive and simulation tools that policy-makers really need to have before the next crisis appears, as well as to assist in steering us out of this one. Certainly, the infrequently available data describing economic and financial systems in extremis will be an invaluable input for models designed to forecast and avert future crises. Likewise, the actual results from the planned “experiments” will also provide hard evidence for the model-makers to incorporate in their designs.
Ventana does believe that policy-makers will receive some short-term benefits from its efforts because we expect that a complete recovery from the current crises will take longer than the eighteen months needed to complete useful, tested models. However, the majority of the payback from this work will enable collaborative members and government agencies to better deal with future crises. Ventana’s confidence in its ability to create these powerful tools is based on its very well-received work for various government and industrial clients. The firm creates its models using a proven combination of dynamic-system modeling, agent-based simulation, boundary-condition tests, and advanced statistical tests and analyses. This time-tested combination of techniques makes it possible both to identify the root causes of complex problems and to discover the most effective means of controlling them. The resulting models and control policies will dramatically improve forecasting as well as reduce the intensity of this and future economic and financial crises. These models and policies will also assist the financial services sector in effectively responding to these challenges.
In addition to providing the technical expertise to lead the Collaborative, Ventana will contribute its considerable investment in Energy, Environment, Economy (E3) modeling along with its current work on banking system modeling. For the first six to nine months, Ventana plans to work with member technical leads to complete the addition of an agent-driven banking sector to E3 along with stock exchange, housing construction, and fully qualified energy and climate sectors. These additions will enable the Collaborative to explore the root causes of both the stock and the housing bubbles and provide the necessary model components to fully explain both the long-term and recent behavior of the economic system.
The Collaborative will examine a range of possible economic meltdown drivers, from, at one end of the spectrum, the unprecedented rise in the ratio of total debt to GDP to, at the other end of the spectrum, the failure to rescue Lehman. The intent will be to address directly FED Chairman Bernanke’s admonition that we make the creation of a system to understand better how to resolve the potential failure of systemically important financial firms a top priority. This would be one of many incentives for involving government agencies in active support of this work.
To form the Collaborative, Ventana is inviting some leading Fortune 50 corporations, including financial services institutions, and key government organizations (such as the National Science Foundation and the Office of Science of the DOE) to participate. Ventana will provide technical leadership and project management. Collaborative members will help communicate the project’s progress and its results to appropriate Federal agencies.
The first public sector opportunity to put the Collaborative into action comes near the end of the 1st Quarter ’09 with an expected DOE/NSF request for proposal to analyze the impact of the Stimulus Plan’s investment in R&D on green jobs, on the GDP and on climate programs. Ventana’s work on the E3 model (‘Energy, the Environment, and the Economy’) for the DOE over the last four years uniquely qualifies it for this assignment. Early formation of the Collaborative will help win this DOE/NSF assignment, which in turn could fund a significant part of the entire project. Ventana proposes that each participant contribute technical expertise to the Collaborative limited to approximately eight hours per week from no more than four or five experts at any one time. Financial contributions to the economic system analysis will be limited to an initial investment to jump-start the project and an annual contribution thereafter for two additional years. Five to eight private/public partners will contribute the balance of the estimated total project cost (between $20M and $30M). These costs, in addition to model building and analysis, will include technical coordination, engagement of critical outside expertise, and dissemination of the results.
The inclusive process that Ventana has used in its California Greenhouse Gas Emissions regulatory analysis is a very effective prototype for coordinating constituents with widely differing agendas and differing values as well as for resolving factual issues.
Benefits for Collaborative Members
The economic system model will explicitly demonstrate the basics of how individual companies and their strategies interact with technologies, resources, companies’ competitors, the banks, the federal government, and stock markets. As a result, members can expect the following benefits from their participation:
- Heightened positive public image as thought leaders and innovators
- Improved forecasting of future interest rates
- Knowledge of share-pricing pressures
- Recognition of the most effective federal policies
- Improved corporate strategic planning through realistic, in-depth scenario analyses
- Insight into future energy price trajectories and emergent energy markets
- Perspectives on other emerging markets
- Understanding of the impacts of carbon regulation
A project audacious enough to guide the redesign of the global financial system should be expected to provide far reaching benefits for the participants as well as additional insurance for the creation of future stable economic growth.