An Intersection of Engineering and Economics

In going through some of the stories posted on Abnormal Returns, I came across a story from the WSJ Economics Blog and found it interesting that Ben Bernanke and his ilk like to refer to what happened during the Great Depression as a form of a feedback loop. They apparently term the failing of one bank as a detrimental effect to other banks as a negative feedback loop. However, this is incorrect. The negative feedback is what the Fed would want to provide in the form of lower rates and increased liquidity while the compounding effect of cascading bank failures would be the positive feedback. That is, negative feedback causes attenuation of the input, eventually down to zero if it was a true feedback control loop. Conversely, positive feedback would result in the values taking off toward infinity.

This actually got me to thinking about what kind of system this bank data would actually look like, and if you could come up with some kind of control design (P, PI, PID, velocity-feedback, etc.) that would translate into how much to lower interest rates or what other actions should be taken in order to keep banks on their feet longer, thereby avoiding the calamitous outcomes of the Depression Era. Of course, this would require much more time than I would care to put into it. I guess the Fed will have to figure that one out without me.