Columbia University sociology professor (and Cornell applied math PhD) Duncan Watts:
Rather than waiting until the next cascade is imminent, and then following the usual modus operandi of propping up the handful of firms that seem to pose the greatest threat, it may be time for a new approach: preventing the system from becoming overly complex in the first place. (link)
NY Times columnist and Nobel laureate Paul Krugman:
So I think of the pursuit of a world in which everyone is small enough to fail as the pursuit of a golden age that never was. Regulate and supervise, then rescue if necessary; there’s no way to make this automatic. (link)
(Hat tip to Noah Brier for the links)
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With a nod to David Weinberger for the post title, I read the above two articles and thought “Why doesn’t the internet fail?”
The internet is an interconnected network, bearing incredibly high volumes of activity, constantly under attack, and yet has not had a systemic failure. Take out a DNS root server, and the system repairs itself. Cut one of the undersea cables, and traffic can find a different route.
Maybe the financial system can learn something from this. Forcing banks to stay below a certain size isn’t exactly right; what’s important is having enough capacity in the system to survive the collapse of a small number of central players, just like how the Internet stays up if a root server goes down. Regulators should be responsible for constantly determining what those capacity reserves should be, as that number will float up (or down) depending on the national and global economy.
