Stock plunge, Greek debt crisis, and the power of credibility

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Four minutes. That's all it took for the stock price of consultancy Accenture to plunge from $40 to 1 cent yesterday. It recovered nearly all of those losses in just two minutes, epitomizing one of the wildest and scariest trading days in Wall Street history.

Some blame machines: The rise of automated computer trading, where sophisticated algorithms make decisions in nanoseconds, raises the risk of a "cascade effect" like the one that happened Thursday afternoon, causing mayhem in moments.

Others blame people: Perhaps someone's "fat finger" pressed "b" for "billion" instead of "m" for million.

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Even as investigators sift for clues to explain the turmoil, the larger lesson is as ancient as an abacus: markets depend on credibility. And credibility depends on the integrity of prices. A price is a remarkable thing. It's a universal coordination tool, a promise, and a truth-telling device. When prices accurately reflect the desires of buyers and sellers, they coordinate billions and billions of human decisions harmoniously. When prices lie – whether through trading errors, government subsidies, inflation, or failure to pay up or deliver services – problems multiply.

Greece's debt problems go way beyond algorithms and fat fingers. But amid all the talk of austerity measures, bond ratings, and government bailouts, bear in mind Thursday's lesson: what markets value most is credibility. "Let's do whatever it takes to become trustworthy borrowers!" will never be a catchy protest slogan, but what a difference it would make if the Greek protesters who stormed the Acropolis this week shared its sentiment.

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