A post relating to this item from Finextra:
29 April 2009 | 4306 views | 1
Financial risk managers could learn a lot from the study of bio-engineering and natural sciences says Andy Haldane, the Bank of England's head of financial stability.
Andrew Haldane's paper "Rethinking the Financial Network" really is an excellent piece and the first convincing explanation of the current financial crisis that I've come across. Highly recommended.
In a nutshell, Haldane's argument is simply that the complexity of the global financial industry has increased to such an extent that, like all such systems - eg the weather, oceans, rain forests - it is inherently subject to largely unpredictable and catastrophic
collapses from time to time. The familiar metaphor from chaos theory of a butterfly flapping its wings on one side of the world and causing a hurricane on the other is roughly the idea. He goes on to draw valuable insights from fields such as epidemiology,
ecology and the management of large networks.
This got me thinking about the role of the financial media in the crisis and I can't resist having a go, on several counts:
Firstly, they really didn't see it coming.
Secondly, most reporting is obsessed with who is to blame, when a corollary of Haldane's analysis is that it's a systemic problem - ie everybody and nobody is to blame.
Thirdly, despite the previous point, it's arguable that the media have played a very damaging role in exacerbating the problem (although this is a difficult one - Haldane makes a good point that the informed reporting of SARS actually nipped it in the bud;
and maybe the same thing is now happening with swine flu)
Finally, and most importantly, why have we had to wait so long for a coherent explanation of the crisis? Another of Haldane's points is that the financial system is fragile precisely because it lacks diversity - there is a dangerous herd mentality. Maybe
this extends to the financial media. Maybe the FT should employ more ecologists or cyberneticians? I don't know.
It will be interesting to see if Haldane's views get the publicity I think they deserve. On the other hand, maybe he's wrong? What do you think?