Financial Crisis

What is Cyber Systemic Risk?

Submitted by Scott Cleland on

“Cyber systemic risk” is Internet-driven risk that threatens to destroy the business viability of industry ecosystems.

While cybersecurity risk may be the familiar and recognizable type of cyber systemic risk, it is only recognizable like the tip of an iceberg is recognizable, because most cyber systemic risk lurks well out of view, deep beneath the surface in the ocean of virtual ones and zeros.

“Cyber systemic risk” generally is the Internet version of the financial crisis’ hard lesson of “systemic risk,” where the world learned that risks or disruptions to one or a few financial institutions could cascade to become risks or disruptions to the broader financial ecosystem. That’s because the inherent inter-linkages and inter-dependencies of financial institutions’ debt and liquidity exposed the then underappreciated fragility of the interwoven financial system.

The financial crisis exposed the need and the requirement for corporations to be more vigilant concerning enterprise risk management (ERM). Consequently the next crisis exposing enterprise risk is less likely to happen from a replay of known financial systemic risks, but from new unappreciated or ignored cyber systemic risks.

Cyber systemic risk is arguably more serious than financial systemic risk. That’s because the Internet inherently is: the most inter-linked, inter-dependent, intermediary system ever created; an insecure and un-private system; and more centralized and concentrated at the top than the financial ecosystem.

Systemic Flash Crash Vulnerability: Financial Crisis Root Causes: Part IV

Submitted by Scott Cleland on

The SEC/CFTC report on the May 6th "Flash Crash" helps confirm that automated index trading technology was a contributing cause of the 2008 Financial Crisis and why recent financial reforms are not enough to address the ongoing destructive systemic vulnerability that automated index trading technology increasingly poses for financial markets going forward.

 

Systemic Uneconomics: Financial Crisis Root Causes: Part III

Submitted by Scott Cleland on

To discern the real “root” causes of the financial crisis of 2008, one must probe beneath the surface and examine the health of the “root system” of our capital markets “forest.” The roots of the capital markets forest are sound economics; the natural market function of automatically equilibrating supply and demand and risk and reward, that is commonly appreciated as Adam’s Smith’s “invisible hand.” We generally assume that the natural market strength of the capital market forest’s root system ensures that all the trees are not in danger of being blown over in the crisis of a storm.

 

In the fall of 2008, we all were shocked to learn that the root system of our capital markets, that we had always assumed was healthy and strong, was actually frighteningly weak and brittle requiring the slapdash reinforcement of multi-trillion dollar emergency scaffolding of whatever material was close at hand, a TARP, bailout lifelines, capital sandbags, etc. -- to buttress the main market “trees” from toppling over, trees that the Government judged to big to be allowed to fall.

 

Challenging Mr. Bogle's Claim Indexing is Investing

Submitted by Scott Cleland on

With all due respect to Mr. John Bogle, legendary founder of Vanguard and de facto leader of the American index fund movement that now manages ~$1.5 trillion, I must respectfully challenge, on the merits, Mr. Bogle's, and others, ongoing mischaracterization of indexing as "investing."

Indexing into the Ditch -- Financial Crisis Root Causes -- Part I

Submitted by Scott Cleland on

Despite the widely held view that indexing is the safest way to invest, indexing helped recklessly drive our financial system and economy into the ditch last fall.

  • While there’s consensus the financial crisis warrants “new rules of the road” and better policing to protect against systemic risk, all the rules and oversight in the world can’t keep us out of the ditch in the future if index vehicles continue to drive the wrong way against oncoming traffic.
  • And “stress testing” whether bank vehicles can survive head-on crashes, completely misses the point that indexers should not be driving the wrong way on the freeway.

A major reason the system has become so unstable and dangerous to financial security is that over ten percent of money management vehicles on the road today are indexers, which by design drive the wrong way against the oncoming traffic of a market economy that allocates capital based on economic merit.

Diagnosing the Financial Crisis' Root Causes

Submitted by Scott Cleland on

This is an introduction and background for my new multi-part research series on diagnosing the root causes of the Financial Crisis.

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