Question: what’s contagious, mutates, and can harm its host?
The Swine Flu? Or toxic financial assets? The answer is, both. Both depend upon networks, are highly adaptive, and respond to engineering solutions. We’ve learned a lot since the outbreak of the Spanish Flu some 90 years ago. And we’ve learned a lot about financial contagion. Some of the solutions are quite similar.
Take, communication: by letting people know early about the new flu virus, we’ve greatly improved people’s preparedness. And since the banks’ health has been known, most people have been able to protect their core savings. Second, regulation: by centralizing disease data with the CDC in Atlanta, we’ve provided a needed clearinghouse for diagnosis and analysis. Similarly, by shoring up the core of the financial network, Treasury and the Fed have stopped most of that contagion. Finally, structure: diversity increases resistance to infection in both biology and in banking.
Lessons from disease control directly apply to the economy. Let’s hope that the successes we’ve enjoyed in one arena will inform our approach to the other.
Douglas R. Tengdin, CFA
Chief Investment Officer
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