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European Tribune - Tiptoeing around the Anglo Disease
Complexity also adds to the danger that any one part of the hyper-financial system can bring down the whole.
No, it is not the complexity of financial instruments that is responsible for this, but the greater degree of interconnectedness in the financial markets. The complexity of financial instruments is a result of the pursuit of efficiency above all other considerations. Efficiency does bring complex, interconnected systems closer to "the edge of chaos" and makes system-wide crises more likely.

If capital flows were contained by national borders (as they were until the 1980's) any one part of the system could only bring down a national economy. An analogy with wildfires and the role of firebreaks is apt here.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 26th, 2008 at 11:01:52 AM EST
True, but the fact of complexity can make "risk management" effectively impossible.

I suppose I'm groping towards the idea that it may not actually be the Rating Agencies fault. We may have reached a point where it's not possible to calculate the risk involved in some of these instruments.

Of course, part of the disease is the reliance on calculation, many of us looked at various instruments and could see trouble ahead, but the "calculation models" did not...

by Metatone (metatone [a|t] gmail (dot) com) on Sat Jan 26th, 2008 at 11:30:36 AM EST
[ Parent ]
If you can't estimate the risk of something you don't stick a big fat zero in the calculations.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 26th, 2008 at 11:32:28 AM EST
[ Parent ]

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