Systemic Risk:: deep collapse in “nested adaptive cycles”
Monday, 13 February, 2012 2 Comments
I don’t write this blog because I am intent upon coming across as some smartarse, know-it-all, merchant of doom! Rather, accepting the limitations of my own knowledge, I want, as far as is possible, to inform readers (thanks for your interest!) of issues that affect each and every one of us.
I reckon, if I prompt individuals to ask questions of themselves, me, employer, politicians, trusted advisors or media sources then that is good. If I can answer questions even better. If I cannot, then that may be all the motivation I need to consider a worthwhile topic further or from another perspective. After all, with the communication tools we have at our disposal in the Digital Age, this IS a “Knowledge Economy”.
Part of the problem, that bothers me, is that many of the established sources of information are not as reliable as they would have you believe. Some only see information through the lens of engrained belief systems – a form of blindness. Others rely upon a cocktail of manipulation and, deliberate, misinformation. If this sounds far-fetched please stop to consider: what we have learnt about the culture in Institutions, in whom we were “happy” to trust; how we came to learn of the nature and scale of “abuse”: how long before “abuses” were admitted; why, despite, such as WikiLeaks, Occupy, etc. so little has changed; when we can expect to see perpetrators held to account for their actions?
The TRUTH is…all around us
OK, I admit it I have become a real cynic when it comes to the words of established ‘experts’. Particularly the self-anointed variety, oft found in the corridors of financial and political power! Their expertise often relates to experience of a past era and, whilst it may have served them well, as the basis of the kudos and wealth that success brought them, but underlying theories, structures and processes have been shown to be deeply flawed &/or inadequate for the current environment.
I wasn’t born this way but have learnt that, in the absence of TRANSPARENCY as a basis for TRUST, it is safer to “read between the lines”, question or to seek clarification. You know what they say about making an ASS out of U and ME!
Unfortunately, events of the last few years suggest that, rather than admit to failings, left to their own devices, “leaders” of the prevailing culture would prefer death to dishonour. But that isn’t nearly as noble as it sounds…think in terms of the demise of Col. Gaddafi. The pain and death needlessly inflicted upon innocent citizens in Tunisia, Libya and Egypt, who had had enough and chose to challenge the validity of Kleptocracies!
Now we have seen the malignant nature and spread of greed-fuelled “Irresponsible Capitalism” we should understand that, wasting increasingly scarce resources, trying to “contain” or manage the disease, is a battle for which we are ill-equipped and will, ultimately, lose. In Nature, no system is “too big to fail”!
The current system is unsustainable and so fragile that, without intervention [regeneration*] at molecular level, will become increasingly vulnerable to systemic collapse as a result of, even, minor “shocks” from – unforeseeable [exogenous] natural environments; sources of risk in man-made systems and ecosystems (that, without appropriate tools, remain) unseen, unmanaged and, therefore, exposed to unforeseen…NOT unforeseeable [endogenous] failure or collapse.
*new culture and resilient structure (Financial & Operational]
Whether we call it irresponsible capitalism or something else, doesn’t matter too much to the man and woman on the streets of UK, USA, Syria, Spain, Greece, etc. Or to ex-employees at AIG, RBS, Lehman Bros. It’s what it means to their well-being and that of their children, that they are components in political and financial systems that may or may not be deemed “systemically important” or TBTF, until, systemic failure occurs across scales and domains…
Then the questions start: why, how, who, what next? The “answers” are, at best, unconvincing!
I hope this graphic and quote from Buzz Holling adds some understanding of the nature of the current problems [if not PLEASE read the full article] because he doesn’t have an agenda to pursue. He isn’t a banker or economist. He isn’t a politician. He isn’t a Religious leader. But he knows about complex systems in ecology.
The “panarchic cycle” or “nested panarchic cycles” (below) are a result of his work in nature. But there can be little doubt that the lessons are “universally applicable” to complex systems OR that the financial and technological infrastructures that we have created during a period of of unprecedented, sustained, growth are extremely complexo AND FRAGILE.
The growth phase we’re in may seem like a natural and permanent state of affairs-and our world’s rising complexity, connectedness, efficiency, and regulation may seem relentless and unstoppable-but ultimately it isn’t sustainable…
I think rapidly rising connectivity within global systems-both economic and technological-increases the risk of deep collapse. That’s a collapse that cascades across adaptive cycles-a kind of pancaking implosion of the entire system as higher-level adaptive cycles collapse, which causes progressive collapse at lower levels.”
In 2007 the US National Academies/National Research Council and the Federal Reserve Bank of New York collaborated on an initiative to “stimulate fresh thinking on systemic risk”.
First, how much money is spent on studying systemic risk as compared with that spent on conventional risk management in individual firms? Second, how expensive is a systemic-risk event to a national or global economy (examples being the stock market crash of 1987, or the turmoil of 1998 associated with the Russian loan default, and the subsequent collapse of the hedge fund Long-Term Capital Management)? The answer to the first question is “comparatively very little”; to the second, “hugely expensive”.
Even less effort has been put into providing regulatory incentives to promote diversity of balance sheet structures, business models and risk management systems. In rebuilding and maintaining the financial system, this systemic diversity objective should probably be given much greater prominence by the regulatory community.