Too Big to Fail or Too Primitive to Succeed?
June 25, 2011 Leave a comment
Our economy very nearly experienced a financial version of Armageddon due to the gap between a primitive governance structure and highly sophisticated tools employed by a few with interests that were deeply misaligned with the needs of sustaining our national and global economy. We have all since unwillingly experienced the negative impacts of untamed technology while experiencing few of the benefits of the tamed; whether for resolution of the current crisis or prevention of the next.
Given the systemic nature and scale of the financial crisis, and in consideration of the poor ongoing economic conditions, it’s clear that the financial industry, political process, and regulators have all fallen short of achieving the individual mission of each, particularly in consideration of current technological capabilities.
For the past several months financial institutions have been attempting to convince regulators that they should not be labeled a Systemically Important Financial Institution (SIFI). The process of implementing the 2010 Dodd-Frank law in the U.S. has resulted in spin offs in an attempt to avoid increased U.S. regulation, while the new global rules for multi-national banks on top of Basel III, including surcharges and increased capital ratios, is resulting in a comprehensive rethink of the fundamental assumptions surrounding the global banking model.
Observing this dynamic invites a mental imagery of bureaucrats, politicians, and academics in team competition, each applying favored remedies such as duck tape over economic journals in a futile attempt to plug giant leaks in the hull of a Nimitz-class aircraft carrier.
When basic human greed clashed with globalization, networking, and technology, the combination introduced a complexity far beyond the organizational structures and tools available to regulators or corporations. Indeed, the reaction we’ve observed suggests that remedies employed to manage this crisis were designed for a war fought over seven decades ago during the Great Depression; an era when state-of-the-art technology was represented by the IBM Type 285 Numeric Printing Tabulator– capable of tabulating 150 cards per minute. The hourly sales of IBM today are approaching the annual sales of 1933, and billions of records are now run in seconds, yet our archaic regulatory system is employing printing presses in response to the largest financial crisis in 75 years.
A great deal has been learned in recent years beyond traditional economic theory about the systemic nature of networks, social behavior, contagion, and the global economy, with considerable investment in basic and applied research focused on technologies specifically designed to prevent systemic crises.
In the era of high performance computing on an increasingly interconnected planet with ever expanding pipes, economic tipping points can be reached very quickly that can bankrupt even the previously most wealthy nation on earth, particularly in a weakened economic condition suffering from structural problems. Focusing on SIFIs is of course essential, even if tardy by decades, but the emphasis should be on managing real systemic risk, which requires a very specific data structure that ensures data integrity, enhanced security, system-wide automation, modernized organizational structures, and continual, real-time improvement.
Without deep intelligence on the constantly changing relationships in a carefully constructed semantic layer, and automatically managed by pre-configured data valves, systemic risk is impossible to manage well, or even I argue at a level that is minimally acceptable.
Sophisticated new multi-disciplinary systems have been designed specifically to address the modern challenges in systemic risk management, but have yet to be built out and deployed. Policy makers should insist on the new generation of technologies to better protect citizens and the economy; regulators should embrace and promote the technology for it’s impossible to meet their mission otherwise; and financial institutions should adopt the technology due to rare ROI and sharply reduced levels of risk.