RMS Titanic. Public Domain. Source: Wikimedia Commons
With LIBOR alternatives, Ponzi schemes, and financial corruption still in the news, many folks are saying, “Stop the financial system, I want to get out!” But exiting the current financial system just isn’t practical. Sure, we could turn off our cell phones, raise our own wheat, and buy and sell stuff using Bitcoins or Ether, but that’s just not practical. Changing to an Amish lifestyle or getting off the grid would mean moving back to a 19th-century standard of living, where basic survival was a priority and people died just because they got infected blisters.
And 19th-century life wasn’t financially that simple, either. There were competing gold-based, silver-based, and paper currencies, some of which were “not worth a Greenback” – the Civil War paper currency. The Second Bank of the United States was filled with scandal, dishing out equal parts graft and payola. It gradually evolved into our modern central bank.
And our current financial system isn’t so complex system as it’s highly interconnected. We have local banks, global banks, investment banks, insurance companies, mutual funds, and hedge funds all playing in the same sandbox. There isn’t enough hierarchy and modularity, so a few centralized players become “too big to fail” and if they become insolvent they could pull down the entire financial system. That’s what the Financial Crisis was all about.
What we need is a modular system, where one sector’s failure wouldn’t threaten the others. That’s what we see in biological systems, where a broken bone doesn’t endanger our heart, or in education systems, where problems in elementary schools are distinct from issues in community colleges or research universities. It’s what was supposed to happen on The Titanic but too many of her waterproof hull sections were ruptured.
A modular financial system could still be flexible enough to handle the modern world but would have subsystems whose failure wouldn’t endanger the others. Yes, our financial world is complex—always has been. But it needs to be safer.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”