Date: October 5th, 2011
Cate: Finance, Risk & Stability, Systems
Tags:

Make the financial sector a well run zoo again.

From the 1930s on into the 1980s, the American financial system resembled a well-run and orderly zoo. The various species — banks, securities dealers, insurance companies, etc. — were neatly caged within functional and geographical specialties, prevented and protected from competition with one another. Although competition remained active within each cage, specialized and benign keepers made sure it did not assume lethal proportions. And as in a real zoo, it was just as safe for the public to view a lion as a rabbit: deposit insurance and other safeguards were firmly in place. source: http://www-ceel.economia.unitn.it/events/monetary/wojnilower.html

 

The quote above is from Albert M. Wojnilower a new York based economist. I like the aspects of compartmentalization for the financial sector.  Compartmentalization is a standard design strategy for minimizing contagion and failure related to complexity and normal accidents.  De-coupling operational elements of a system makes the system more robust and less likely to succumb to cascading failures.

Trading financial efficiency (ROE and big bonuses related to monster institutions) for safety will take a strong regulatory stomach but is likely worth it in the long run.

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