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June 08, 2009

Comments

Paul Wallis

Irving,

During centuries of global economic development understanding precisely how business interacts with flows, firstly of water - then steam - then electricity - then oil, petroleum, and components - has been vital for businesses, the economy and society:

1770s - mechanisation, factories, and canals – water
1830s - steam engines, coal, and iron railways – steam
1870s - steel and heavy engineering, telegraphy, refrigeration – electricity
1910s - oil, mass production, and the automobile – oil; components; petroleum

Over time, the professions of architecture and engineering, and various sciences, co-operated to develop standards and practices of measurement, management, safety, optimisation and valuation to accurately understand these various flows.

The result was clarity about how the business worked.

This created trust.

That is why huge industrial plants are often sited relatively close to centres of population. It is why we don’t think twice about starting a car, turning on a kettle or lighting a gas ring.

There is always operational risk. But all over the modern world, no matter the political system, no matter the economic system, no matter the regulatory regime, the above holds true. The understanding of flow is critical to understanding how the business works and to creating trust.

And where there is trust people are more likely to do business.

Today, most business sectors rely heavily on IT and flows of data.

But unlike, for example, the utilities, finance does not know precisely how data (money) flows through the assets of the business.

There are many technical and business reasons for this circumstance, but in a nutshell, in today’s world finance doesn’t have enough understanding of how everything is put together to make the business, and the financial system, work.

Andrew Haldane of the Bank of England discussed this in his recent speech "Rethinking the financial network", where he spoke of the financial network as a place where ‘complexity caused seizures in certain financial markets’ and ‘financial innovation…increased complexity and uncertainty.’

He went on to discuss ‘appropriate control of the damaging network consequences of the failure of large, interconnected institutions’, and the need ‘to ensure the financial network is structured so as to reduce the chances of future systemic collapse.’

In the U.S., a joint study by the Federal Reserve Bank of New York and the National Academy of Sciences, "New Directions for Understanding Systemic Risk" (2007), opens with:

'Guarding against systemic risk in the financial system is a key undertaking for central banks. Defining this type of risk is difficult, but managing it with precision is harder still. Complicating this task is the fact that institutional consolidation, a broadening range of financial products, and greater connectivity among firms have in recent decades materially changed the nature of systemic risk in the financial system.'


Financial institutions must see things clearly and understand exactly how the financial system works, so as to rebuild trust.

Clarity will be achieved by understanding precisely how data flows.

@Edw3rd

What is that phrase? "when you're a hammer, everything looks like a nail"

My concern is that President Obama has assembled his own set of like-minded people. But instead of hammers, they are screwdrivers.

Tim Dempsey

Irving,
A post that inspired me to draw analogs with the flow of ideas and the social technologies of web ?.0. I am fascinated with the notion of risk as the flow of ideas accelerates. How do we deliver quality when there are no barriers to entry to the media? Here is is: http://www.elasticbrands.com/blog/2009/07/the-strain-that-will-cause-the-next-web-pandemic-im1/

Are you still lecturing at MIT regularly?

Kitchen Scales

I would agree that Mr.President has gone way too far with the socialist theory and trying to get healthcare swaying that way.. It doesn't work.. Socialism never works.

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