How Financial Crises are Like Hurricanes

Felix Salmon opines on how financial crises are similar to huge storms, such as the impending Hurricane Sandy barreling down on New York and the rest of the East Coast:

Financial crises are similar to storms: they require humility, not hubris. Being prepared can be helpful at the margin, but ultimately it doesn’t matter how good your liquidity management teams and risk ledgers and counterparty hedging operations are: if everybody else is blown over by forces beyond their control, then you will be too.

That’s why skyscrapers always used to be built well above the water level, and that’s why we used to have dumb regulations like Glass-Steagal and Basel I, which weren’t very sophisticated, but which generally did the trick. Buildings like 200 West are a bit like Basel III: they’re built with models, so that they can withstand certain forces. But if an unprecedented storm arises, they’re still more at risk than, say, Trinity Church, built more than 150 years earlier. Sometimes, simple common sense (high ground is safer, huge books of complex derivatives can blow up in unpredictable ways) does a lot more good than any amount of sophisticated preparation.

The gist of Felix’s post relates to how Goldman Sachs is protecting its multi-millionaire dollar headquarters with sandstorms, but the analogy can be expanded to all the big banks.

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