legislation can be interpreted as a search for a
structure that would eliminate instability.
Experience shows that this search failed and
theory indicates that the search for a
permanent solution is fruitless.”
Minsky (2008, p.349), Stabilizing an
Unstable Economy.
The sociologist Charles Perrow received international recognition after the release of his award winning book; 'Normal Accidents: Living with high risk technologies'. In the publication he looked at the existence of accidents in the highly complex world of engineering and the role organisations play in the context of disasters in general. He identified that conventional approaches to ensuring the safety of personnel within these exceedingly elaborate systems will, ultimately always fail, predominantly due to the presence of two common characteristics referred to as 'tight coupling' (interconnectedness) and high degrees of 'interactive complexity'.
Increases in the complexity and globalisation of the financial services industry, particularly over the last four decades or so, has led to an environment which shares many key characteristics with the complex systems Perrow describes. If his theory of Normal Accidents can be applied to the financial sector then The Great Depression, 1997-98 Asian Crisis and recent Global Economic Crisis are the financial industry's very own Piper Alpha, Chernobyl and Space Shuttle Challenger.....Accidents waiting to happen, or in terms of probability, near certainties.
The interdependence of financial markets has led to a financial system that is more connected and more complex than ever before. With this has come an increase in the potential for systemic crisis, an event we were all made abruptly aware of in 2007/08. What then is the answer?
Well the truth is no one really knows. One thing that is universally accepted is that in the event of another crisis the core components to a well-functioning economy; principally the payment system, mortgage system and small to medium enterprise lending segment of the market must remain intact.
With the luxury of hindsight I feel an approach similar to that undertaken by President Roosevelt in 1933 is required - note the marked decrease in banking crises under the Glass Steagall Act from the graph in the previous post. The best option available to policy makers and regulatory architects worldwide is a complete overhaul of the way in which the financial sector and more specifically banks are regulated. -I have discounted free banking as a potential remedy as Hickson and Turner, 2002 illustrate how the 1893 banking crisis in Australia was the natural consequence of an unregulated environment.
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