
Too complex to exist - robg
http://www.boston.com/bostonglobe/ideas/articles/2009/06/14/too_complex_to_exist/?page=full
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russell
The article posits that certain parts of our societal ecosystem are getting so
complex that failure has catastrophic consequences and gives two examples:
power grid failures and failure of the financial system. It goes on to propose
that if something is too big to fail, break it up. to wit, enforce antitrust
when something is too big to fail. While antitrust and limiting size is part
of the arsenal of solutions, it is incomplete.

It is not a solution to eliminate complexity. The electrical grid is an
example as is the financial system. If we pave over New Mexico to generate
green solar power, we need a complex electrical grid to deliver the power to
the users, otherwise we all have to move to New Mexico. The power grid problem
is a need for redundancy. Parts will always fail. We need to have enough
redundant capacity to route the power around the failed component. The
Internet is robust because it has lots of redundant switching capacity.

The financial system is a different animal. Its problem is not one of single
point of failure, typical of physical systems, but one of systemic failure,
algorithmic failure. It all breaks in the same way because everyone is using
the same algorithm, whether it be everyone invests in real estate using the
greater fool theory, or everyone uses the same risk management model, or
everyone writes derivatives without enough reserve. The savings and loan
crisis of the 80's wasnt the failure of a few big players, it was the failure
of lots of local players. Back to engineering, these are failures of positive
feedback loops. What is needed is negative feedback, something that pushes
back in the opposite direction. In the case of derivatives, a reserve
requirement is a negative feedback.

I think the financial system also needs the equivalent of the CDC to watch for
viral memes. The South American loan defaults, the savings and loan crisis,
the near failure of Lehman Brothers in the 80's all should have vaccine
against over speculation among the financial community. It didnt. Instead we
got Alan Greenspan.

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DTrejo
>the financial system also needs the equivalent of the CDC to watch for viral
memes.

Amen.

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metaguri
Not to make a shameless plug, this is something that the company I work for is
working on:

[http://www.palantirtech.com/government/analysis-blog/sec-
tra...](http://www.palantirtech.com/government/analysis-blog/sec-trader-
oversight)

~~~
DTrejo
This is an awesome tool. If I were an investigator I would DEMAND that. From
the video it seems so encompassing!

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jerf
I think in both cases the best solution is to somehow mandate slack. The
temptation is to run both the financial system and the electric grid as hot as
possible. In the grid case, this means that the grid is running at 100% and if
anything goes wrong, the whole thing just unravels as nobody can pick up any
slack. In the financial world, this manifests as leveraging as much as
possible to grab as much positive investment as possible, and when the
investment ticks even the slightest bit negative you get total, massive
bankruptcy and unpayable debt.

In both cases, if we didn't leverage so much or run the grid so hot, a failure
is much more likely to be contained. The downside is that it is more
expensive, you're leaving money on the table or putting up more power capacity
than you really "need"... but it only takes one financial disaster to pay for
years of slightly less growth, and only one total power failure for an
extended period to suck as much value out of the economy as you would have put
into building more capacity. If you don't account for the possibility of
disaster it looks like a terrible investment, but factor that in and it looks
downright prudent.

Look at the stock value graphs of the past 30 years; would you trade a lesser
growth rate for not having the past year on your graph? _I_ sure would!

The primary problem as I see it is the question of how you mandate financial
slack. Mandating excess power capacity would be relatively straightforward
(though it blends with "green energy" initiatives _very_ poorly as they tend
to add virtually no baseline power to the grid), but even _defining_ financial
"slack" is a challenge, let alone making the system robust. There are just so
many games that can be played with paper that it may not be actually possible
to prevent huge leverage.

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magoghm
The Federal Reserve could have added extra slack very easily just by
increasing the reserve requirements. But that goes against what seems to be
the Fed's standard inflationary policies.

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timwiseman
The article assumes that these institutions are truly too big to fail. But
what would have happened if they had been allowed to go into traditional
bankruptcy?

Alternately, what would have happened if they had been allowed to fail in a
controlled way, something similar to an FDIC takeover rather than the
"bailouts" that were done?

Are there any good resources or analysis on it? I would be highly interested.

