In fact, if Jamie Dimon, Christopher
Dodd, and Barney Frank had all read Perrow's book, they would have discovered that
for a large number of complex systems, neither better organization nor
technology will make them less prone to accidents, and that frequently they
become even more vulnerable to certain types of accidents.
The recent history of
the financial world reads like a textbook account of normal accidents. Some big failures of note: Lehman
Brothers and AIG during the 2008 financial crisis; the May 6, 2010 Flash Crash
when the Dow Jones Averages dropped 600 in five minutes, only to bounce back
twenty minutes later; the implosion of the Icelandic economy in 2008 that
resulted in a 50 percent drop in the value of that nation's currency, and the
unchecked growth in the over-the-counter derivatives market -- from a notional
value of $60 trillion in 2000 to over $700 trillion today.
The financial world is
more accident prone than ever -- thanks in large part to the Internet, the
mother of all interconnections. Not only has the Internet supercharged
financial innovation and created high rates of growth, but it lies at the heart
of many financial normal accidents in the 21st century. In the case
of Iceland, the country was welcomed into the European Economic Area, which
enabled Icelandic banks to operate throughout the continent as long as they had
deposit insurance. At the time,
Iceland had a gross domestic product of less than $20 billion. Yet its banks mushroomed in size. By 2008 they had over $100 billion in assets as investors raced to capitalize on
high interest rates and the rising value of the Icelandic kronur. Iceland's online banks sucked in $6
billion in deposits from consumers in Britain and the Netherlands in a few
years.
But when investors
lost confidence in the Icelandic economy, it triggered a normal accident. Money
that had flowed in over electronic networks, fled at Internet speeds--an
electronic run on the banks. There
was no way the Icelandic Deposit Compensation Fund could meet its commitments
to depositors. Iceland had created
banks that were too big to fail in a country that was too small to save
them. The kronur went into free fall, and lost half its
value.
Over-the-counter
derivatives live in a dark and non-transparent world. High levels of connectivity have made it possible for the
market for these financial products to grow to massive size. The Internet provides the information
backbone for the transactions. The
continuous flow of information allows them to evaluate portfolio risk, keep
track of trading positions, and make trades. These information-age tools allowed Lehman Brothers to
assemble and manage a portfolio that contained 930,000 derivative transactions
at the time of its bankruptcy. As
one former Lehman employee told me, positions of this size "could never have
happened without the Internet."