The Opinion article in the Financial Times, entitled
The Birds and the Bees, and the Big Banks
By Andrew Haldane and Robert May
Published: February 20 2011 19:59 | Last updated: February 20 2011 19:59
Provides clues from nature that might offset the arguments used by the big banks to resist regulations obliging them to hold larger buffers of capital.
In a comment to this article, I draw the attention of other research that led multidisciplinary teams (including biologists), to argue that the present monetary system may well be prone to ever increasing instability, and that the measures that are being taken may well be “des emplâtres sur une jambe de bois” (literally plasters on a wooden leg).
It is interesting (but very alarming) to observe again and again that the intractable problems of our time are still not addressed from a higher level of thinking than the one who created them at the first place. Nothing has been learned since Einstein.
My concern: how can we make sure that we uplift our collective thinking and meaning making one level above its past levels?
The birds and the bees, and the big banks
Are big banks less prone to failure? The traditional economics of diversification suggest so. By scaling up balance sheets across different classes of asset, risks to portfolios will tend, on average, to cancel each other out. Aggregate balance sheet risk is dampened the bigger the balance sheet. Big banks thus benefit from a law of large numbers.
Complex systems – those found in nature, but also in finance – tell a different tale. Here, scaling up risks may cause them to cascade rather than cancel out. The bigger and more complex the structure, the greater this risk.
The present situation in banking is in many respects perverse. The magic of diversification, when assumed into banks’ risk models, means that large, complex banks often hold less capital than their smaller, simpler brethren. The rocket-scientists building models tell us this makes sense. But the rocket-scientists building rockets tell us it is nonsense. This error has cost the world dear. Through this year, the Financial Stability Board is leading the charge to boost loss-absorbing capital for the largest, systemically important institutions to correct this error. It is right to do so.
Very Interesting analysis.
In the same vein, I would draw attention to very interesting analyses of a multidisciplary team, (Lietaer, Ulanowicz, Goermer, Gomez) suggesting that the same laws that apply in complex ecosuystems also may apply on complex socialm systems, and may explain the lack of stability of the present monetary system as structural.
The question hence is, are we solving the right question? Or should we be looking at the problem from another level of thinking than the one that created the problem in first instance (paraphrasing Einstein)?