At last! A coherent account of the financial crisis.

Postscript.  What should I find in this morning's FT but a good article by Gillian Tett on precisely this subject.  Very encouraging!

Nicely summarised.  Haldane is a bright spot in the world of central banking, and his speeches are all worth analysing. I have been reading and re-reading this one.

You have hit on the core point of this one - that the problem with systems lies in the very lack of diversity.  This finding is worthy of note because it is intuitively the oppositive of what we might expect in a capitalist economy.  One would assume capitalism would survive based on diversity and opposing forces, yet this suggests the opposite. 

Fascinating stuff.

I haven't read Haldane's paper, but based on your précis of it I'm afraid I don't find the thesis at all convincing.

The current financial crisis is not very different in character or depth to financial crises throughout modern history, from Dutch tulip mania and the Missisipi bubble in the 17th century, the South Sea bubble in the 18th, the Overend & Gurney and Barings collapses in the 19th century, and in the 20th century the panic of 1907, the crash of 1929, the S&L crisis of the 80s -- and in the 90s alone, the TLCM collapse, the Japanese asset bubble and Asian financial crisis. They seem to be getting more frequent.

Almost all of these crises were caused by the same thing: the invention of a new way of speculating and/or new new financial instruments that were (a) very profitable for their promoters, and (b) sufficiently complicated, novel or mysterious for people not to appreciate (or to be able to conceal) the risks involved.

The current crisis is no different. The 1929 crash was mainly caused by the widespread use of leverage, a new way of buying stocks that was very lucrative in a rising market but carried unrecognised risks. The 2008 crash was mainly caused by the widespread use of credit derivatives, a new way of packaging debt that was very lucrative in a rising market but carried unrecognised risks.

There is no need to invoke "unique complexity" as if this crisis is somehow something that has never happened before. It has happened many, many times before -- that's the depressing thing. The main difference this time is that it's global in scale, because of the increasing interdependence of the world's economies.

If you're looking for someone to blame, you could do a lot worse that focus on the regulators, whose job was precisely to prevent this from happening and who have so far managed to slide out of accepting any accountability at all.

Paul - I thoroughly recommend reading the Haldane speech text. Especially before challenging it :)

The subtext is just as compelling, in my humble view, as the words at face value. Haldane implies that just like adverse weather conditions, epidemics, forest fires etc, systemic financial crises are not only inevitable but necessary in a system which requires evolution to survive (as capitalism does). That is exactly why blame is inappropriate. Kudos to Paul at finextra.com and Anthony Hilton of the Evening Standard for discovering/reading the speech and spotting its quality.

Fair enough. Where can I find it?

There is a copy of it available by clicking the link at the end of this article:

https://www.finextra.com/fullfeature.asp?id=1150