Too Big to Fail? Or Too Brittle to Sustain?


Simon Johnson’s NYT Economix peice is worth a read, simply to see him call the much vaunted “resolution authority” a unicorn. I think the same of a “systemic risk regulator”, and a “CFPA”…but both of those are things that I’m assuming Johnson favors, so they don’t get a mention with unicorns, which is too bad.

In any case, he identifies a problem:

Even the supporters of our existing financial structure – men like Hank Paulson (in On The Brink), Larry Summers (in his 2000 Ely Lecture), and Jamie Dimon – concede that big crises occur every 5 years or so. What hit us in 2008-09 was not a “once per century” event. Rather it was the latest – and scariest – in a series of regular global crises that goes back to at least the 1970s.

But then, he blames this on “too big to fail” (or too politically-connected to fail?). But of course, the size of the firms doesn’t matter, because it’s falling NGDP that causes problems. However, if you look at complex systems in nature, there is a “window of viability” in which the system reaches the maximum amount of efficiency and diversity to remain sustainable. The US (and global) financial system is extremely efficient, but it pays a price for this efficiency in robustness. If you look at the evidence, the equivalent of a mere gust of wind toppled our biggest banks in the last crisis. It was the exact reverse in the Great Depression. If you look at the chart below, you’ll see a red dot that represents the current US financial system. The US financial system of the Great Depression would have been located on the far right of this distribution.

What we need to do is incentivize the creation of diversity in the finance industry, and in the realm of money systems themselves.

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