January 20, 2011
Can anyone explain the recent financial crisis? I’ve been listening to Planet Money and This American Life try to do so over the last couple of years, but it’s only driven home how complex everything is. Even simple questions like “what is money?” and “how much is there?” aren’t easy to answer. But metaphors are good. And the idea that ecosystems might be an appropriate analogue, as proposed in a Perspective in this week’s Nature, is intriguing.
Andrew Haldane, of the Bank of England, and Robert May, a biologist at Oxford University, draw analogies with food webs and infectious diseases in their attempt to describe the banking industry and find ways to better prepare it to prevent and weather future downturns. The biggest obstacle to their attempt is that we seem to have created a financial system far more complex than any natural ecosystem. But if you look at banks as nodes in a network, it’s easy to see the parallels with ecological concepts like food webs and epidemiological networks modeling disease spread. And perhaps, as in ecosystems, stability does not rise as the network gets beyond a certain size; at that point, problems that arise spread throughout the system, possible causing collapse.
There are lessons to be had from the world of ecology, say Haldane and May. We could be promoting and managing ecosystem resilience better by requiring banks to have a larger proportion of liquid assets on hand in case of some sort of shock to the system. Taking a lesson from epidemiology, we could focus on limiting the number of “super-spreaders” within the network; but instead of quarantining infected individuals we would somehow limit the number of “super-spreader institutions,” those banks more familiarly labeled as “too big to fail.”
Of course, the banking system is not an ecosystem, as a News and Views article that accompanies the piece cautions. But if the models the financial system has been using are part of what got us into this mess, perhaps they might be advised to look elsewhere for some help.
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