|
Why Our
Financial System Is Like The Titanic
The
"unsinkable" global financial system is rushing
headlong toward its encounter with the iceberg.
By Charles
Hugh-Smith
March 15, 2016 "Information
Clearing House"
-
Why did the Titanic sink, despite
being considered unsinkable? The
conventional answer is the design of its
watertight compartments was flawed: the
watertight bulkheads were limited in height to a
few feet above the waterline.
The ship was designed such that if the first few
compartments were flooded, the flooding would be
contained by the watertight bulkheads.
But the iceberg ripped open a gash almost a
third the ship's length, flooding the first six
compartments. As the ship's bow sank, water
poured over the bulkhead into the seventh
compartment, and so on, until the ship's bow
sank deep enough to bring the ship almost
vertical, at which point the hull broke roughly
in half--hence the two hull sections discovered
on the bottom of the Atlantic in 1985.
But further analysis has revealed
this isn't the only reason Titanic sank. It
turned out the ship's hull plates were brittle
due to high sulfur content in the steel,
especially at cold temperatures (the water was
near freezing at the time of the wreck).
Rather than deform as the iceberg scraped
against the hull, the plates and rivets
fractured, opening the gash that sank the ship.
The technologies of the early 1900s enabled
shipbuilders to construct enormous ships almost
900 feet in length capable of steaming at 24
knots, transporting passengers across the
Atlantic in comfort, but the technologies that
made such ships and transits low risk were not
yet developed.
The fact that large ships and
powerful engines could be built created the
illusion of low risk, because the risk factors
were invisible until disaster struck. After
the disaster, the flaws in the design of the
watertight bulkheads, the inadequacy of the
lifeboat requirements (there were not enough
lifeboats for the crew and passengers), and the
deficiencies in the wireless/radio requirements
(ships were not required to have radio operators
on duty 24 hours a day) were all obvious.
But the flaws in the steel plates and rivets
would remain invisible until the technologies of
steel production finally caught up with the
other shipbuilding technologies. And better
detection and tracking of icebergs would have to
wait for radar and better navigational
technologies.
Our financial system is like the
Titanic: technologies
such as high-frequency trading (HFT) and
innovations such as securitization and complex
derivatives have enabled major players to
construct an enormous, fast-moving financial
system that creates the illusion of low risk
because the risks are not visible until disaster
strikes.
The Global Financial Meltdown of
2008-09 was a close call, the
equivalent of the Titanic veering off and barely
missing the iceberg. In response, authorities
imposed a variety of new regulations that are
the equivalent of changing the regulations
guiding lifeboats and radio operations.
But these regulations did nothing
to address the risks created by the technologies
of financialization that have leapfrogged safety
systems and the real economy. In
effect, the idea that the financial system is
unsinkable remains intact, even though the flaws
in its design (the equivalent of the watertight
bulkheads) and its core technologies (the
equivalent of the flawed steel plates) remain
invisible.
The financial system's huge size and apparent
strengths have created a false confidence that
it is unsinkable, and the ineffective
regulations imposed after 2008-09 have only
added to the illusion that the risk of a
complete collapse is low.
All that has been accomplished
since 2008-09 is there are a few more lifeboats
and better communication when disaster strikes. But
the risks of financial disaster have actually
increased since 2008-09, as participants have
bypassed regulations via shadow banking, dark
pools,etc., and deepened their dependence on HFT
skimming via superfast trades executed by
superfast computers.
The "unsinkable" global financial
system is rushing headlong toward its encounter
with the iceberg, while the passengers and crew
remain supremely confident and unaware of the
risks, risks that will
only become "obvious" after the global financial
system has broken in half and sunk to the
bottom, destroying most of those who believed it
unsinkable.
Charles
Hugh Smith -
http://www.oftwominds.com
Copyright 2014 Charles Hugh Smith all rights
reserved in all media. |
