Eurozone & EU survival: If it keeps on rainin’ levee’s gonna break..


Robert Plant (left) and Jimmy Page (right) of ...

Image via Wikipedia

 

You may never have figured Robert Plant, Jimmy Page and Co. as financial analysts or students of economic theory. But why not? At the end of the day these guys – LEGENDS – have as much chance of accurately predicting the financial future as anyone else!!!

The truth is the levee is “shot”…

It’s been raining like hell for for too many years now. The “weathermen” [economists & bankers] manipulate the rainfall data and assure us that the long term outlook is good – their incentives depend upon a belief system that bestows such power upon them!

Whilst the “engineers” [politicians & Public Sector] prefer the “finger-in-the-dyke” approach to flood prevention. After all, if you believe the weathermen, the outlook is sunny and anyway, the levee is “too big to fail”. In the meantime taking as much money as possible from both weathermen and those [citizens] living on the flood plain. After all if you have gotten away without major repairs or reconstruction for this long [and been able to grow “fat” at the expense of others], with sovereign debt so easy to come by, probability is that no-one will ever know unless they get too close. Risk worth taking. Better to do that than own up to the years of neglect and mismanagement!

So long as there are enough digits to plug the holes, bodies to absorb or divert the leaks and “they” stay dry. So long as the pressure doesn’t get so great as to suddenly exploit any undetected cracks [hidden fragility]  “on our watch” they will hail us as the best damn levee-keepers in living history. Knighthood, memoirs, TV, column, lecture tours, universal adulation. It’s brilliant! Flawless!

Well the bad news is that the game is up.

This is an extract from my blog in August this year. Complex Systems and Ecology: Report by US National Academies/NRC & Fed. Reserve Bank of NY

 

Catastrophic changes in the overall state of a system can ultimately derive from how it is organized — from feedback mechanisms within it, and from linkages that are latent and often unrecognized. The change may be initiated by some obvious external event, such as a war, but is more usually triggered by a seemingly minor happenstance or even an unsubstantial rumour. Once set in motion, however, such changes can become explosive and afterwards will typically exhibit some form of hysteresis, such that recovery is much slower than the collapse. In extreme cases, the changes may be irreversible.

Contagion: “Too big to fail” banks as ‘superspreaders’

…a basic principle in the management of forest fires and epidemics is that if there is strong interconnection among all elements, a perturbation will encounter nothing to stop it from spreading. But once the system is appropriately compartmentalized — by firebreaks, or vaccination of ‘superspreaders’ — disturbance or risk is more easily countered.

As the report notes, this is a complicated question, because modularity will often involve a trade-off between local and systemic risk. Moreover, the wrong compartmentalization in financial markets could preclude stabilizing feedbacks, such as mechanisms for maintaining liquidity of cash flows through the financial system, where fragmentation leading to illiquidity could actually increase systemic risk (as in the bank runs leading to the Great Depression). Redundancy of components and pathways, in which one can substitute for another, is also a key element in the robustness of complex systems, and effective redundancy is not independent of modularity.

Read the thoughts of Mervyn King and Andy Haldane from Bank of England…

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s