This Sociological Theory Explains Why Wall Street Is Rigged for Crisis - Bill Davidow -... - 0 views
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near brush with nuclear catastrophe, brought on by a single foraging bear, is an example of what sociologist Charles Perrow calls a “normal accident.” These frightening incidents are “normal” not because they happen often, but because they are almost certain to occur in any tightly connected complex system.
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Perrow had a fairly simple solution for the problem. High-risk systems, such as nuclear power plants, should be built only as a last resort.
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errow stresses the role that human error and mismanagement play in these scenarios. The important lesson: failures in complex systems are caused not only by the hardware and software problems but by people and their motivations.
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Normal accidents, like these, occur because two or more independent failures happen and interact in unpredictable ways. After studying calamities such as the Three Mile Island meltdown, explosions at chemical plants, and ships colliding in the open sea, Perrow observed that safety mechanisms put in place to make the systems safer in fact frequently trigger the final failure.
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That solution won’t work for financial markets. We need currency hedges, futures markets, and derivatives to keep our economic systems functioning. But we also have to realize tweaking the current system will not fix the problem. Most of the supposedly strong cures implemented by legislators to date, such as prohibiting bank holding companies from proprietary trading, are inadequate as well.
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how do we make our markets less danger prone? A good place to start would be to reduce the excessive trading volumes that lie at the root of accidents like the Flash Freeze, Flash Cash, and Goldman debacle. There is no valid reason for high frequency trading to make up more than 50 percent of all stock trades, and there is no pressing need for some $4 trillion in daily foreign currency transactions. A Tobin tax on transactions, first suggested by Noble laureate James Tobin in 1972, of as little as 0.1 percent, would significantly reduce these volumes. Smaller transaction volumes would reduce the size of accidents and possibly their frequency.
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But tinkering with the current system and looking for easy ways out, as we are now, is bound to fail. We’re in danger of letting normal accidents in the financial system become all too normal.