\u00e2\u20ac\u0153Complexity cloaks Catastrophe\u00e2\u20ac\u009d<\/p>\n
William Leiss (17 January 2012)<\/p>\n
Complexity cloaks Catastrophe<\/a>\u00c2\u00a0-\u00c2\u00a0PDF<\/p>\n Good risk management is inherently simple; adding too many complexities increases the likelihood of overlooking the obvious.<\/p>\n Leiss, \u00e2\u20ac\u0153A Short Sermon on Risk Management\u00e2\u20ac\u009d (https:\/\/leiss.ca\/?page_id=467<\/a>)<\/p><\/blockquote>\n <\/p>\n The quoted phrase that forms the title for this paper comes from the opening pages of Richard Bookstaber\u00e2\u20ac\u2122s indispensable 2007 book, A Demon of our own Design:\u00c2\u00a0 Markets, hedge funds, and the perils of financial innovations <\/em>(New York:\u00c2\u00a0 Wiley).\u00c2\u00a0 This book inspired much of my own subsequent work in this area, as published in The Doom Loop in the Financial Sector, and other black holes of risk <\/em>(University of Ottawa Press, 2010:\u00c2\u00a0 e-book available at:\u00c2\u00a0 http:\/\/www.press.uottawa.ca\/book\/the-doom-loop-in-the-financial-sector<\/a>);\u00c2\u00a0 see the section on \u00e2\u20ac\u0153Complexity\u00e2\u20ac\u009d at pages 80-83).\u00c2\u00a0 Bookstaber\u00e2\u20ac\u2122s key point is that complexity in financial innovations is itself an important risk factor for systemic failure in the financial sector.<\/em><\/p>\n Now the New York Times<\/em> columnist Joe Nocera has written in his January 17 column, \u00e2\u20ac\u0153Keep it Simple\u00e2\u20ac\u009d (http:\/\/www.nytimes.com\/2012\/01\/17\/opinion\/bankings-got-a-new-critic.html?hp<\/a>), about an important new source for this topic.\u00c2\u00a0\u00c2\u00a0 This is a November 2011 paper prepared by staff at a firm called Federal Financial Analytics, Inc.:\u00c2\u00a0 \u00e2\u20ac\u0153A new framework for systemic financial regulation:\u00c2\u00a0 Simple, transparent, enforceable, and accountable rules to reform financial markets,\u00e2\u20ac\u009d available as a PDF file at:\u00c2\u00a0 http:\/\/www.fedfin.com\/images\/stories\/client_reports\/complexityriskpaper.pdf<\/a>.<\/p>\n In effect, both the paper and Nocera\u00e2\u20ac\u2122s commentary argue \u00e2\u20ac\u201c with reference to the U. S. Dodd-Frank Act \u00e2\u20ac\u201c that responding to complexities in financial innovations with complex regulatory regimes is a mug\u00e2\u20ac\u2122s game.\u00c2\u00a0 It does not solve the problem of \u00e2\u20ac\u0153complexity risk\u00e2\u20ac\u009d and in fact may exacerbate that risk.\u00c2\u00a0 It also does a poor job of anticipating the next challenge, as the recent collapse of MF Global shows.<\/p>\n The Obama administration has put its faith in \u00e2\u20ac\u0153smart regulation,\u00e2\u20ac\u009d which ignores the fact that it is the industries being regulated which can hire the smartest people and task them with finding a way to circumvent any set of rules, however complex.\u00c2\u00a0 (Meanwhile, his Republican opponents work feverishly to gut his regulatory agencies of competent staff and leaders.)\u00c2\u00a0 Similarly, the authors of the paper, \u00e2\u20ac\u0153A new framework for systemic financial regulation,\u00e2\u20ac\u009d propose solutions involving new corporate-governance regimes, but the private-sector risk governance regimes failed utterly the last time around, so why on earth would the rest of us want to retry this experiment?<\/p>\n In the end we have to turn to the most reliable guide, Simon Johnson, whose advice is simple:\u00c2\u00a0 Break up the big banks.\u00c2\u00a0 (Follow his blogs at:\u00c2\u00a0 http:\/\/baselinescenario.com\/<\/a>; the latest is, \u00e2\u20ac\u0153Refusing to take yes for an answer on bank reform.\u00e2\u20ac\u009d)\u00c2\u00a0 Banks to big to fail should be regarded as too big to exist.\u00c2\u00a0 And yet the leading financial institutions in the United States are bigger than ever.\u00c2\u00a0 No \u00e2\u20ac\u0153systemically-important financial institution\u00e2\u20ac\u009d will ever be allowed to fail.\u00c2\u00a0 The bankers who run them know this.\u00c2\u00a0 They also know that they cannot be outsmarted by the regulators.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" \u00e2\u20ac\u0153Complexity cloaks Catastrophe\u00e2\u20ac\u009d William Leiss (17 January 2012) Complexity cloaks Catastrophe\u00c2\u00a0-\u00c2\u00a0PDF Good risk management is inherently simple; adding too many complexities increases the likelihood of overlooking the obvious. Leiss, \u00e2\u20ac\u0153A Short Sermon on Risk Management\u00e2\u20ac\u009d (https:\/\/leiss.ca\/?page_id=467) The quoted phrase … Continue reading