Technology@Crisis

Perrow's book Normal accidents (1984) summarizes that technology intensive industries are more prone to suffer those accidents, due to:

- Complexity (nonlinearities.

- Tight coupling (multiple stages of a process which depend intimately on prior stages executing correctly.

1xtra*: absence of negative feedback over an extended period of time.

It is hard-wired in human behavior that we underestimate risk if nothing has happened recently.

e.g.: nuclear power plants, chemical industries, space programs, ..
Since 1974, 18 national level Banking Crisis around the world ('77 Spain, '87 Norway, '91 Finland and Sweden, '92 Japan.

Rogoff & Reinhart find these among the causes of the current crisis:
- Rising housing and stock markets
- Capital inflowsLarge public debt/GDP
- Financial liberalization

Measures aiming Crisis Preparation and Crisis Prevention (gathered from specialists):

- Break up banks and broker/dealers that are too big to fail

- Create exchanges for CDSs and other large OTC contracts

Create financial N1SB for analyzing all blow ups

Require confidential disclosure regarding "network"exposures

- Implement counter-cyclical leverage constraints for bank-like entities

- Enforce "suitability"requirements for mortgage-broker advice

- Require certification for mgmt. and boards of complex financial institutions

Impose more mark to market accounting and risk controls

Impose capital adequacy requirements for all bank like entities

Create new discipline of risk accounting

Impose small derivatives tax to fund financial engineering programs

Revise laws to allow "pre-packaged"bankruptcies for finance companies

Change corporate governance structure (compensation, CRO role, etc.)

- Teach economics, finance and risk management in high school