24
2 Complexity Time Bomb
“Fortunately, the overall financial system appears to be in good health, and
the U.S. banking system is well positioned to withstand stressful market
conditions.”
As we all know with the benefit of hindsight, things turned out very differently.
A banking crisis occurred only shortly later. It started locally, when a real estate
bubble burst, which had formed in the West of the USA. As it was a regional
problem then, most people thought it could be easily contained. But the mortgage
crises had spillover effects on stock markets. Certain financial derivatives could
hardly be sold and became “toxic assets”. Eventually, hundreds of banks all over the
US went bankrupt. How could this happen? A video produced by professor Frank
Schweitzer and others presents an impressive visualization of the chronology of
bankruptcies in the USA after Lehman Brothers collapsed.
18 Apparently, the default
of a single bank triggered a massive cascading failure in the financial sector. In the
end, hundreds of billions of dollars were lost.
The video mentioned above looks surprisingly similar to another one, which I
often use to illustrate cascading effects.
19 It shows an experiment in which many
table tennis balls are placed on top of mousetraps. The experiment impressively
demonstrates that a single local disruption can mess up an entire system. The video
illustrates chain reactions, which are the basis of atomic bombs or nuclear fission
reactors. As we know, such cascading effects can be technologically controlled in
principle, if a certain critical mass (or “critical interaction strength”) is not exceeded.
Nevertheless, these processes can sometimes get out of control, mostly in unexpected ways. The nuclear disasters in Chernobyl and Fukushima are well-known
examples of this. We must, therefore, be extremely careful with large-scale systems
potentially featuring cascading effects.
2.8 A World Economic Crisis Results
As we know, the cascading failure of banks mentioned above was just the beginning of an even bigger problem. It subsequently triggered a global economic and
public spending crisis. Eventually, the financial crisis caused a worldwide damage
of more than $15 trillion
20 —an amount a hundred times as big as the initial real
estate problem. The events even threatened the stability of the Euro currency and the
EU. Several countries including Greece, Ireland, Portugal, Spain, Italy and the US
were on the verge of bankruptcy. As a consequence, many countries are suffering
18 See http://www.youtube.com/watch?v=o2Budc5N4Eo.
19 See https://www.youtube.com/watch?v=vjqIJW_Qr3c.
20 See http://blogs.wsj.com/economics/2012/10/01/total-global-losses-from-financial-crisis-15-tri
llion/; http://www.bernerzeitung.ch/wirtschaft/standard/200-000000000000DollarLast/story/248
65034.
2 Complexity Time Bomb
“Fortunately, the overall financial system appears to be in good health, and
the U.S. banking system is well positioned to withstand stressful market
conditions.”
As we all know with the benefit of hindsight, things turned out very differently.
A banking crisis occurred only shortly later. It started locally, when a real estate
bubble burst, which had formed in the West of the USA. As it was a regional
problem then, most people thought it could be easily contained. But the mortgage
crises had spillover effects on stock markets. Certain financial derivatives could
hardly be sold and became “toxic assets”. Eventually, hundreds of banks all over the
US went bankrupt. How could this happen? A video produced by professor Frank
Schweitzer and others presents an impressive visualization of the chronology of
bankruptcies in the USA after Lehman Brothers collapsed.
18 Apparently, the default
of a single bank triggered a massive cascading failure in the financial sector. In the
end, hundreds of billions of dollars were lost.
The video mentioned above looks surprisingly similar to another one, which I
often use to illustrate cascading effects.
19 It shows an experiment in which many
table tennis balls are placed on top of mousetraps. The experiment impressively
demonstrates that a single local disruption can mess up an entire system. The video
illustrates chain reactions, which are the basis of atomic bombs or nuclear fission
reactors. As we know, such cascading effects can be technologically controlled in
principle, if a certain critical mass (or “critical interaction strength”) is not exceeded.
Nevertheless, these processes can sometimes get out of control, mostly in unexpected ways. The nuclear disasters in Chernobyl and Fukushima are well-known
examples of this. We must, therefore, be extremely careful with large-scale systems
potentially featuring cascading effects.
2.8 A World Economic Crisis Results
As we know, the cascading failure of banks mentioned above was just the beginning of an even bigger problem. It subsequently triggered a global economic and
public spending crisis. Eventually, the financial crisis caused a worldwide damage
of more than $15 trillion
20 —an amount a hundred times as big as the initial real
estate problem. The events even threatened the stability of the Euro currency and the
EU. Several countries including Greece, Ireland, Portugal, Spain, Italy and the US
were on the verge of bankruptcy. As a consequence, many countries are suffering
18 See http://www.youtube.com/watch?v=o2Budc5N4Eo.
19 See https://www.youtube.com/watch?v=vjqIJW_Qr3c.
20 See http://blogs.wsj.com/economics/2012/10/01/total-global-losses-from-financial-crisis-15-tri
llion/; http://www.bernerzeitung.ch/wirtschaft/standard/200-000000000000DollarLast/story/248
65034.