Complexity and connectivity, and the problems they can cause. And the notion that “too big to fail” might mean “too big to be allowed to exist.”
Much like the power grid, the financial system is a series of complex, interlocking contingencies. And in such a system, the biggest risk of all – that the system as a whole might fail – is not related in any simple way to the risk profiles of its individual parts. Like a downed tree, the failure of one part of the system can trigger an unpredictable cascade that can propagate throughout the entire system.
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[W]e tend to overlook a fact that should be obvious – that once everything is connected, problems can spread as easily as solutions, sometimes more so. Thanks to globally connected transportation systems, epidemics of disease like SARS, avian influenza, and swine flu can spread farther and faster than ever before. Thanks to the Internet, e-mail viruses, nasty rumors, and embarrassing truths can spread to colleagues, loved ones, or even around the world before remedial action can be taken to stop them. And thanks to globally connected financial markets, a drop in real-estate prices in California can hurt the retirement benefits of civil servants in the UK.