by: Stephen J. Collier and Andrew Lakoff
This installation of ARC Studio examines the concept of systemic risk. Systemic risk has become a central topic of expert discussion and political debate amidst the financial crisis that began in 2008, but it also has resonances across many other domains in which catastrophic threats loom – including internet security, supply chain management, catastrophe insurance, and critical infrastructure protection. Following the broad orientations of the Studio, we have not tried to present a comprehensive exposition of the history and present uses of systemic risk. Instead, we have invited scholars to contribute genealogical and conceptual framings that can inform critical inquiry into this increasingly important concept. The result is not a traditional collection of academic articles but rather a set of brief, preliminary reflections, prepared on short notice, that address a common set of questions:
by: Onur Özgöde, Columbia University
Since the early 1980s, national financial systems began to play an increasingly important role in the creation and distribution of wealth in modern capitalist economies. This structural transformation was celebrated by macroeconomists and policymakers, known as monetarists and neo-liberals, as a crucial step toward achieving sustainable and long-term economic growth, free of periodic recessionary disruptions due to cyclical adjustments in the structure of the economy. While this reform strategy proved to be successful in terms of minimizing both the frequency and the disruptive effects of recessions, it has brought into being a pathology of its own in the form of systemic financial crises.[i] At this juncture, financial catastrophes manifested themselves as the most serious threat to not only financial and macro-economic stability, but socio-economic prosperity as well. In response to this new governmental problem, systemic risk emerged as the key governmental concept that animated recent regulatory initiatives to prevent and mitigate such catastrophes in the future. Continue Reading →
by: Grahame Thompson, Open University and Copenhagen Business School
According to Michael Woodward (2009) modern macroeconomics has seen a convergence of views centred around the ‘efficient market hypothesis’ (EMH). This theoretical position posits that all unfettered markets clear continuously thereby making disequilibria, such as bubbles and crises, highly unlikely. Indeed, in terms of the EMH framework, economic policy designed to eliminate bubbles would lead to ‘financial repression’: resulting in higher interests rates, the unnecessary rationing of credit and the loss of profitable investment opportunities. That such views about a cosy consensus could have been announced just as the deepest meltdown in financial activity since the 1930s was maturing is perhaps testament to the complacency of conventional economic analysis. But it has not shaken the conventional belief in the virtues of such a framework amongst the mainstream macroeconomic modelling community. Rather the crisis has been interpreted as a simple ‘random error’ within a still robust EMH framework for economic analysis (Minford 2009). On the other hand the cisis has had some impact on the regulatory and policy making community, as will be discussed in a moment. Continue Reading →
by: Stephen J. Collier and Andrew Lakoff
In a 1962 lecture to the War Industrial College, the Director of the US Office of Emergency Planning (OEP), Edward McDermott, described his agency’s mission. Charged with preparing the nation for nuclear war, the scope of OEP’s responsibility was impressive:
We are really talking about the fundamentals of life on this earth; the elemental problems of safeguarding the food we eat, the fuel we consume, the transportation to maintain a steady flow of commerce, an intricate telecommunications system which will continue to function under all conditions, and perhaps most important, the foundation of constitutional government which underpins our way of life. These are the things that concern the OEP.
While its area of concern was potentially limitless, the OEP approached this vast array of “things” in a distinctive way: as a collection of critical and interdependent systems to be safeguarded against the catastrophic disruption of nuclear attack. In this essay, we briefly describe how, from the mid-1950s to early-1960s, experts and officials charged with preparing for nuclear catastrophe in the United States sought to manage “the fundamentals of life on this earth” by producing a new kind of knowledge that focused on risks to the critical systems that underpinned collective life. Continue Reading →
by: Benjamin Sims, Los Alamos National Laboratory
In the realm of U.S. homeland security, the word of the day seems to be “resilience.” As a sociologist working in this area, I encounter the term more and more frequently, in a variety of contexts. More publicly, Secretary of Homeland Security Jeannette Napolitano has frequently spoken about her department’s efforts to “strengthen the resilience of … infrastructure, computer networks, and of … communities and citizens” (link). Resilience is also prominently mentioned in recent Homeland Security policy documents, including the 2010 Quadrennial Homeland Security Review, which lists “Ensuring Resilience to Disasters” as one of five core “Homeland Security Missions” (link), and the 2009 National Infrastructure Protection Plan (NIPP), which now emphasizes the dual goals of “protection and resilience” (link). The Department of Homeland Security (DHS) sponsors conferences of its grantees in the academic community under the rubric of “Science and Technology for Intelligent Resilience” (link/). Resilience is a broad concept as it is used in the homeland security realm – it can refer to the technological nuts and bolts of infrastructure, as well as the more general character of a community, region, or nation. Though it is too soon to say for certain, the term may be on its way to encompassing or displacing more established terms like “protection” and “vulnerability.” Continue Reading →
by: Brian Lindseth, UCSD
The notion of resilience has become increasingly salient in recent decades in fields ranging from public health preparedness to critical infrastructure protection. As Benjamin Sims has noted, the use of the concept of resilience to indicate a norm that critical systems should strive for comes from the field of systems ecology – specifically from a seminal 1973 article by CS Holling.[i] In Brittle Power, Amory and L. Hunter Lovins provide a key example in their call to “formulate the principles of a design science of resilience.” They attribute their debt to those “who study the survival and stability of ecosystems,” and particularly “the Canadian Ecologist Professor C.S. Holling.”[ii] In this essay I explore the meaning and intellectual lineage of Holling’s concept of resilience.
In his 1973 article, Holling contrasts approaches emphasizing the dynamism, complexity, and unpredictability of nature with a more widespread view emphasizing the stability of nature.[iii] In foregrounding a comparatively narrow range of relations between populations of predators and prey, the latter approach overemphasizes the durability of supposedly stable equilibrium relations and obscures other kinds of relations. By contrast, an approach based on resilience is more open to the dynamism and complexity of the natural world. This openness allows ecologists to recognize the systems in nature that can survive disturbances, if often in different forms. Continue Reading →
Andrew Haldane, Senior Bank of England official, has called for more ecology in the study of finance (read his report). A Financial Times Article reports and offers analysis by prodigal anthropologist Gillian Tett (and co-authors).
by: Christopher Kelty, UCLA
The Morris worm was released in November of 1988. It was launched surreptitiously from an MIT computer by graduate student Robert Tappan Morris at Cornell University, and spread to internet-connected computers running the BSD variant of UNIX. The worm was designed to be undetectable, but a design flaw led it to create far more copies of itself than Morris estimated, and resulted in the drastic over-taxing of all the computers on which it was installed. This in turn allowed for its immediate detection and the repair of the flaws that it exploited.[i]
The Morris worm was not a destructive worm, it only caused computers to slow and buckle under the weight of unnecessary processing. Nor was the intent of Morris clear: some speculate that the release was either premature or accidental. Nonetheless the event precipitated two different responses that have since become the focus of much attention and concern over the intervening years. Exploring these two responses reveals something about what “systemic risk” might or might not mean in the context of the Internet and how it relates to other uses of the concept.
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Symantec security response demonstrates how to hack a nuclear power plant. Read their report.
by: Deborah Cowen, University of Toronto
In the midst of crisis, public debate about the future of the economy has largely focused on the systemic vulnerability of finance systems. Yet, a different kind of concern with systemic economic risk has preoccupied a set of global professionals and technical experts for the last decade. This other economic vulnerability stems from the material flows of ‘stuff’ that constitute trade: the cargo movement of the global logistics system. The deepening interdependency of firms and sectors within supply chains has increasingly been framed as a problem of systemic risk. As Rice and Caniato (2003:4) assert, “If one firm fails in the supply network, the entire network performance is at risk.” Efforts to protect commodity flows have given rise to a whole new form and field of security. Military and civilian authorities from public and private sectors are actively assembling a global architecture of ‘supply chain security’ that aims to keep stuff circulating. Continue Reading →
by: Elizabeth Cullen Dunn, University of Colorado at Boulder
We live in a risk society. On a never-ending search-and-destroy mission to eliminate sources of potential harm, we constantly develop new systems to identify it and mitigate it. But do risk-management systems make us safer? Or do they instead increase the very risks they are meant to eliminate?
Questions about how Americans find, mitigate and create risks are apparent on a daily basis in the industrialized food system. Since 1993, when E. coli O157:H7 was found in Jack in the Box hamburgers, there has been a multi-state outbreak of food-borne illness nearly every year. From a 25 million pound recall of beef in 2002, to an outbreak linked to bagged spinach in 2006, from the 2009 discovery of Salmonella –laced peanut butter in 2009 to an outbreak of Listeria linked to chopped celery in 2010, it seems that the risk of contaminated food and the fear that goes with it have become inevitable in America’s industrialized food system. Continue Reading →
by: Douglas R. Holmes
In June 2010 I was in London talking to an official of the Bank of England. We were discussing a chart that projected GDP for the UK economy over the ensuing two years. It also happened to retrace the history of GDP since 2006 depicting the scale of the economic decline that marked the onset of the crisis. The chart, a “fan chart,” is unusual insofar as it portrays graphically a probabilistic forecast of GDP with darker bands representing the more likely central projections of GDP and lighter bands representing statistically less likely outcomes. Central banks are proud of their fan charts because they communicate transparently how their policy stance is intended to influence the economic activity over time as well as the limitations inherent in the forecasting exercise. That said, it was hard not be impressed with how this simple chart summarized the course of an astoundingly complex historical event. Continue Reading →
by: Martha Poon, NYU
At the end of the great credit bubble there was still a tremendous amount of borrowing potential in the hands of consumers. Of the $5 trillion in US credit card lines outstanding only $800 billion was reportedly in use. So in the spring of 2009, with unemployment and bankruptcy on the rise, the card companies started to purge their books of plastic. Lenders began unilaterally closing unused accounts in a furious attempt to control costs and reduce exposure. They also began ‘balance chasing’, the practice of systematically trimming down credit line limits as debts get paid off.
Suddenly, through no fault of their own, US consumers with strong credit ratings started seeing their scores slide down the chute. When a lender decided to close a card or cut a line, an individual’s overall credit limit was lowered, and the ratio of line to limit use was instantly increased. This in turn lowered their FICO® credit bureau score, sometimes by more than 50 points. As lenders reabsorbed lines in the transition out of a credit soaked environment, the credit ratings these lines were supporting also deflated. What dropping FICO® scores indicated was this: as credit contracted, the credit risk within the system was increasing. Continue Reading →
by: Myriam Dunn Cavelty, ETH Zurich
Systemic risk in finance refers to at least three things, according to George G. Kaufman and Kenneth E. Scott: It connotes a macro shock that produces nearly simultaneous, large, adverse effects in most or all of the domestic economy or even international financial system. It can also refer to the risk of a chain reaction of falling interconnected dominos or a type of spillover that involves weaker and more indirect connections.
In this short essay, I would like to move beyond this more recent and specific articulation of systemic risk in the financial sector by looking at a broader, though closely related kind: The potential for large-scale disasters or catastrophes characterized by both extreme uncertainty and a potential for extensive and perhaps irreversible harm. This type of systemic risk takes center stage in the highly publicized OECD report on ‘Emerging Systemic Risks’ (2003). The report with its focus on cross-sectoral risk management issues was occasioned by a number of events such as severe storms, the BSE crisis, major blackouts, and last but not least 9/11. It is influenced by the thoughts developed by German sociologist Ulrich Beck, who coined the term ‘World Risk Society’, a society responsible for and faced with universal risks with the potential for the gravest of consequences, which he himself occasionally calls systemic risks to contrast it from individual, local or localized risks. Continue Reading →
View the report “Emerging Systemic Risks in the 21st Century: An Agenda for Action”
by: Philip Bougen, University of New Mexico
“Where does the boundary lie between the history of knowledge and the history of imagination?” (Foucault 1991: 64). Or, what is a systemic risk?
Background: The Terrorism Risk Insurance Act (TRIA) enacted into law in 2002 established a formula whereby the private insurance industry and the federal government would share insurable losses in the event of a terrorist attack in the US. Originally enacted for a three-year duration, with explicit recognition of its anticipated temporary status, the Act was extended in 2005 for a further 2 years and again in 2007 for a further seven-year period. The original stated rationales for the Act were:
A detailed and accessible summary of the legislation is available at: http://www.iii.org/media/hottopics/insurance/terrorism
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Rebecca Lemov, Harvard University
At the Macy Foundation conference on cybernetics in 1951 the inveterate inventor of information theory, Claude Shannon, shocked an assembled crowd when he debuted an electronic rat he had built. (I use the word “debut” advisedly, for this event really did resemble a theatrical debut.) Set down at the opening of a metallic grid that held a five-foot square walled maze, Shannon’s diminutive automaton, fondly christened “Rat,” proceeded to work its way through to the end. Although its movements were not smooth or graceful, and although it looked nothing like an actual maze-navigating rodent, it performed with something like aplomb. When at last it hit the “goal,” a designated sensor on the grid, it lit itself up, rang a bell, and stopped its own motors, as if in celebration. “The machine has solved the maze,” declared its inventor—who, just three years earlier, had authored for Bell Labs his Mathematical Theory of Communication, a work hailed by the end of the century as “the Magna Carta of the Information Age.”
On that day, Rat riveted a crowd of twenty-five of the nation’s foremost social, behavioral, and physical scientists. They had gathered for the eighth of ten meetings unified under the theme of “Circular and Causal Feedback Mechanisms in Biological and Social Systems.” What had them on the edge of their seats was not just Rat’s clever engineering.
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