Category: Think Tank

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2 Responses to “Does Financial Connectedness Predict Crises?”

  1. Mattw says:

    Yes, connectedness predicts crisis. However, crisis is a function of ‘time of stability’. Long periods of stability give connectedness time to grow. It also gives bad ideas, bad decisions and corruption time to grow. Connectedness would fall into the bad idea/decision categories, even though at the time everyone thought it was a good idea.

    Imagine that. A good idea later turned out to be bad. There are a lot of those floating around. What happens to the regulators when they push companies into investments that later turn bad? Mortgages anyone? What about sovereign debt? What about the assumption of independence as the foundation of all our financial models? Anybody ever hear of herding? What happens to economists who can’t even predict last year, let alone an approaching crash like the one in 2008? Isn’t that their job?

    All of these problems are the result of stability. If we would just let small bombs explode, then they wouldn’t turn into big ones, or gigantic ones, or nuclear ones. Now the bomb is nuclear and is getting ready to explode.

  2. rd says:

    It extends to more than financial markets. Hurricane Sandy is a classic example. There hadn’t been a really big hurricane hitting the NYC-NJ area since the 1930s, which of course meant that this particular phenomenom had ceased to be important. So low-lying areas were developed and connected as if these phenomena were now longer impossible and when Sandy hit, it bacame a major crisis on many fronts ranging from personal disaster, civic infrastructure disaster, and future planning decisions that will likely turn into disasters. The assumed stability of the low-lying areas allowed for interconnecting policies between adjacent government jurisdictions to all be filled with happy thoughts which led to it being a major disaster that will ripple for years.