Systemic Risk Rising

Last night three newsworthy events took place, any one of which could make for an interesting blog entry about risk management: President Obama unveiled another attempt to reverse the economic slump, a credible (but uncorroborated) threat against NYC and Washington DC near the 10th anniversary of 9/11 was announced, and California, Arizona and Mexico had a massive blackout.  It’s this last event that inspired this blog entry.

At a Santa Fe Institute presentation last year, I got to hear Duncan Watts (Yahoo!’s Chief Scientist) talk about risk management at the micro-level (think individual fund) and at the macro-level (think the entire economy).  Duncan Watts is a researcher and author on the topic of networks and complexity dynamics, with titles like “Everything is Obvious: *Once You Know the Answer” and “Six Degrees: The Science of a Connected Age.”  The topic of the presentation, though, was about how, in the right kinds of networks, the process of reducing local risk can in fact increase global risk.

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The Risk of Success

Switzerland has a problem – they’ve been so incredibly successful at financial risk controls while the rest of Europe falters, that the Swiss Franc now costs too much for most Swiss to afford their own country’s products!  The Swiss Franc is now so expensive compared to the Euro and the US Dollar that Swiss exports are out of reach for foreigners and the Swiss themselves find much better bargains by crossing the border to any one of their Euro-denominated neighbors.  According to this NPR article, Swiss shopping centers are empty and the Swiss now regularly go shopping in foreign countries.

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