 When
Complex Systems Fail
Jim Willie
CB
Archives
December 7, 2004
Jim Willie CB is the editor of the "HAT TRICK LETTER"
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Sometimes, unfortunately, a
complex system fails. Despite the best efforts to keep an evolving
system together through coordinated management, and attempts
to provide fail safe mechanisms along its evolutionary path,
the system can weaken, degrade, and fail. Due to its enormity
and multi-faceted nature, changes occur slowly and are perceived
to evolve in an orderly manner. A strange public trust is instilled
along the pathogenesis of breakdown, but official statements,
encouragement, and assurance of constant tweaks to controls put
aside public concern. The consequential impact from the potential
failure can be beyond measure. Hyperbolic words such as "enormous"
or "magnificent" or "staggering" really fall
short in their description of the fallout damage. Experience
through past crises, and reactions to them, tend to render the
system more fragile and weakened, not more secure and efficient.
It becomes more subject to stagnation and a pathetic state of
near breakdown, which ironically comes to be accepted as the
"normal" situation. Successive crises have indeed worsened
over time. A worthwhile exercise might be to review a clinical
treatise on the nature and evaluation of systemic failure.
The US Economy, stock &
bond markets, futures contracts leveraged to them, and great
derivative gears hold together the USDollar, the US Treasury
Bonds, mortgages, major metals & energy commodities, and
more. Many devices are designed to keep a limiting cap on prices
and rates, like a huge rooftop atop a house or giant pyramid
shrubs surrounding it. The entire system grows to become tremendously
complex. It has evolved over several decades, and has responded
to numerous unintended disturbances. Central banks provide
the backdrop fail safe in a highly visible overt fashion. Derivatives
provide the foundation underpinning in more secretive collusive
fashion. System foundations date back to the post-Depression,
post-WWII era. Latent growth and solidification took place until
the gold anchor was abandoned, as the Bretton Woods Accord linking
the USDollar to gold was defaulted in 1971. Most crises date
back to that key event in their origins, a simple fact almost
uniformly overlooked by a corrupted economic advisory function
to this day. Shocks have been endured in many recent years. Small
shocks occur almost on a monthly basis. The system continues,
so the public regards the system as functionally capably. How
many times must we hear "the system has not broken yet"
?
Black Monday 1987 delivered
a serious shock to stocks after the USDollar fell as directed
by the 1985 Plaza Accord. Their joint international accord plan
was to reverse the dangerous situation whereby the US manufacturing
base had seen significant abandonment in the early 1980 decade.
The USDollar had appreciated from monetary colossal stimulus
to lift the economy from its recessionary shackles. The inflation
and its effects attracted too much foreign money, an unintended
consequence. The age of currency aggravations and distortions
had begun to wreak its havoc! Huge trade gaps had delivered
capital flows to Asia. The entire US Economy over-invested in
stocks, real estate, and military industrial equipment. In 1989,
Japan stock and housing markets completely collapsed. The system
continued to pour US exported inflation to Asia in response,
essentially ignoring the Japanese experience almost completely.
We reasoned that Asia was bigger than Japan, whose island powerhouse
had gone crazy with speculation. "They got what they deserved"
was the battle cry in rationalization. Hardly a competent analysis
was directed toward true effective change. Instead, roughly $600
billion in Japanese capital hit the shores of the USA. We
repeated Japanese errors, only with utter arrogance of superiority.
The only thing superior is the size of our bubbles and the intricacy
of its machinery.
The 1997 Asian Meltdown delivered
a more serious worldwide shock to currencies and stocks.
Mindlessly and with incredible bravado mixed with childlike naivete,
most US so-called sophomoric experts (like the oaf Barton Biggs)
regarded the Asian hardship as serving the US supply needs like
to a "sweet spot." One year later, the Russian Default
combined with the leveraged hedge fund LongTerm Capital Management
failure to threaten seizure of the entire New York City megacenter
bank system. So much for the sweet spot service from Asia. Back
then my view of the meltdown was more of a financial virus encircling
the globe, a direct systemic response to the complete yield to
irrational exuberance in search of icon hero status. Yet
these experts continue to ply their trade. The likes of Biggs,
Galvin, Yarmeni, Garzarelli, and Abby Jo Cohen provide
extremely high-priced guidance with no discernible track record
of excellence.
The 2000 stock and telecom
bust was the most recent shock delivered to the system. Greenspan
succumbed to irrational exuberance in 1996 almost immediately
after correctly labeling it as such. His policy focused on world
economic growth, and the premier role of the US Economy with
its advanced financial engineering machinery. Liquidity was the
watch word, the stuff of fortunes. It was inflation and nothing
more, well, except for accounting fraud and advanced gamesmanship
with pro-forma techniques. Earnings were exaggerated to conceal
a decline in corporate profits since 1985, amidst a great technology
dawn. What followed was the worst financial market collapse in
world history. The Federal Reserve acted as the great monetary
spigot for the complex system, in yet another misjudgment. Even
easier monetary supply was the response, which has created the
Treasury bond and mortgage bond and housing bubbles. A weak
system continues to weaken further, even as fail safe devices
are deployed at a more rapid pace than ever envisioned.
After each tremor, the system
responded, as a system should. The typical change was greater
magnitude in money supply infusions and lowered interest rates.
Also, greater magnitude in derivative gearing was provided to
prevent damaging bond and currency movement, as directed by the
largest of the world banks. At the same time, vast central bank
support (mostly Asian, but also from Europe) occurred which began
to take on the appearance of subsidy for the entire US Economy.
The system has grown in complexity, under the rubric of normalcy
and flexibility. This was a dangerous development and change
to a large unstable system. Its risks were NOT assessed, either
to the system or to the US Economy, whose currency has been totally
and unequivocally subverted. The USDollar and its side-kick
USTBond had become worldwide insurance money. Today, we sit with
regular and routine accidents occurring, seemingly a new event
with each passing week. The system has come to accept them as,
well, "acceptable and routine." The most feeble of
reasons for justifying the inherent effectiveness is often given:
the system still stands with no obvious collapse.
The United States has fully
embraced the mantle to underwrite any and all international financial
or economic accidents. We do not seem to adapt to change. Instead,
we apply old methods to new situations and expect similar outcomes
as in the past. The system has been forced to adapt during
a time when the normal business cycle has been altered, if not
broken. The presence of China stands clearly as the greatest
new wrinkle within the system.
Large complex systems can be
identified with human biochemical organisms, with natural ecosystems
(the earth itself), with computer networks, with telecommunication
networks, with business supply chains, with regional bank centers,
and with international financial systems. They can and should
be analyzed and viewed as complex systems, with much in common.
Along those lines, an interesting and illuminating document came
to my attention recently from the Cognitive Technologies Laboratory
at the University of Chicago on the subject. When spotted, "How
Complex Systems Fail" struck me as just what the doctor
ordered for a review by the curious in a clinical light. Its
relevance to the US Economy and financial network gave me pause,
even prompted a deeper realization of the scientific dynamics
at work. Feedback, risk assessment, post-crisis analysis, policy
effect, political interference, these all work to alter the system
as though an organism unto itself. Although originally directed
at human patients, the parallel to societal systems is unmistakable
in the following list of factors.
1) Complex
systems are intrinsically hazardous systems.
All of the interesting
systems (e.g. transportation, healthcare, power generation) are
inherently and unavoidably hazardous by the own nature. The frequency
of hazard exposure can sometimes be changed but the processes
involved in the system are themselves intrinsically and irreducibly
hazardous. It is the presence of these hazards that drives the
creation of defenses against hazard that characterize these systems.
Economic recessions used to
occur every 8 to 10 years. In the modern era, a bubble formed
every time a new recession is due. Stock busts like 1987 and
2000 are deemed unacceptable. Therein lie the hazards, with recessions
and stock busts, where people lose jobs and lose investments.
Entire pensions are blown away. People at one time would jump
out of tall buildings during stock crashes. Now, in a more constructive
vein, they go shopping with money they do not have, to purchase
things we do not make, which often are not needed at all, only
to end up in basements, attics, and garages. Our banking system
and federal relief system have responded to enact measures such
as monetary stimulus (lower interest rates) and fiscal stimulus
(tax breaks). The investment community has grown dependent upon
them.
2) Complex
systems are heavily and successfully defended against failure.
The high consequences
of failure lead over time to the construction of multiple layers
of defense against failure. These defenses include obvious technical
components (e.g. backup systems, 'safety' features of equipment)
and human components (e.g. training, knowledge) but also a variety
of organizational, institutional, and regulatory defenses (e.g.
policies and procedures, certification, work rules, team training).
The effect of these measures is to provide a series of shields
that normally divert operations away from accidents.
We call it "off-loaded
risk" in the banking world. Derivatives ratchet the rooftops
with levers and gears so that the weighed down roof does not
collapse. With a small amount of money, even counterfeit money
off the electronic printing press, large amounts of bonds can
be bought in order to prevent rapidly rising interest rates,
or to prevent a disorderly decline in the USDollar, or to prevent
a frightening alarm with a shooting gold price. Foreign central
banks provide the subsidy necessary, so as to preserve the international
imbalances and ward off natural corrections, much like tectonic
shifts would to create earthquakes. The Working Group for Financial
Markets (aka the Plunge Protection Team) operates to save the
day with stocks. Training comes in the form of indoctrination
and outright propaganda, to teach Orwellian chapters from economic
textbooks on topics ranging from inflation, legitimate income
sources, and flexibility. Economic aggregate statistics serve
as the final shield. Unfortunately, they are more a prism of
deception.
3) Catastrophe
requires multiple failures - single point failures are not enough.
The array of
defenses works. System operations are generally successful. Overt
catastrophic failure occurs when small, apparently innocuous
failures join to create opportunity for a systemic accident.
Each of these small failures is necessary to cause catastrophe
but only the combination is sufficient to permit failure. Put
another way, there are many more failure opportunities than overt
system accidents. Most initial failure trajectories are blocked
by designed system safety components. Trajectories that reach
the operational level are mostly blocked, usually by practitioners.
Since 2000 many detrimental
events have occurred, none of which can singly bring down the
system. They sure make their mark though. Fanny Mae & Freddy
Mac accounting fraud combined with massive bond hedge losses
and probable executive indictments. The USDollar bear market
stands as a gradual failure in mega-trend shift. Sharply rising
commodity prices, most notably in energy, drag down the economy
as a direct effect. Colossal trade gaps and federal deficits
put great strain on the international dependence which the United
States has come to rely upon. Stock index declines invite PPT
response. The World Trade Center attack itself was a very visible
shock, met with action. Each represents a failure of sorts. Disturbance
to the insurance business (bid rigging), mutual fund business
(after-hours pricing), brokerage business (IPO kickbacks), and
countless corporate accounting fraud makes for financial sector
strife. The FDA corrupted process for drug product approval is
the latest link in the chain of failures. Through all these,
we trudge on.
4) Complex
systems contain changing mixtures of failures latent within them.
The complexity
of these systems makes it impossible for them to run without
multiple flaws being present. Because these are individually
insufficient to cause failure they are regarded as minor factors
during operations. Eradication of all latent failures is limited
primarily by economic cost but also because it is difficult before
the fact to see how such failures might contribute to an accident.
The failures change constantly because of changing technology,
work organization, and efforts to eradicate failures.
Flaws are omnipresent and fully
minimized in importance. We have failed derivative "houses
of cards" right before us, treated by sanitization procedures
behind closed doors. We have households with negative savings,
after putting aside moronic adjustments like self-paid homeowner
rent and self-paid checking account services. We have inflation
raging to keep an entire nation afloat when all contrived measures
say the opposite. We have a nation requiring almost $2 billion
per day of foreign subsidy. We have trends toward inefficient
cars and heavy gasoline usage while energy prices rise. In most
cases, additional debt and new leverage to supply credit are
the technological tools we use in reaction, which are from the
wondrous evolving financial engineering toolbag.
5) Complex
systems run in degraded mode.
A corollary
to the preceding point is that complex systems run as broken
systems. The system continues to function because it contains
so many redundancies and because people can make it function,
despite the presence of many flaws. After accident reviews nearly
always note that the system has a history of prior 'proto-accidents'
that nearly generated catastrophe. Arguments that these degraded
conditions should have been recognized before the overt accident
are usually predicated on naive notions of system performance.
System operations are dynamic, with components (organizational,
human, technical) failing and being replaced continuously.
The 1989 Savings & Loan
debacle came and went, with the Fanny Mae "new & improved"
mortgage centrifuge put to work. The 1998 LTCM fiasco came and
went in delayed reaction to the Asian Meltdown, with the much
larger derivative pyramid built constructed, primarily by JPMorgan
and its three lesser accomplices. The 2000 stock bust came and
went, with the much larger bond & housing bubbles, justified
as dealing with the stock loss effects but not the cause. To
be sure, our financial system is degraded, runs as a broken system,
and enjoys frequent, regular fixes, some with newfangled devices.
6) Catastrophe
is always just around the corner.
Complex systems
possess potential for catastrophic failure. Human practitioners
are nearly always in close physical and temporal proximity to
these potential failures - disaster can occur at any time and
in nearly any place. The potential for catastrophic outcome is
a hallmark of complex systems. It is impossible to eliminate
the potential for such catastrophic failure; the potential for
such failure is always present by the system's own nature.
In 1998 a common view was held,
the next US Economic recession would bring down the system. In
2002 a common view was the US current account deficit over 5%
of GDP would lead to a currency correction likely to cause system
collapse. The raging derivative monstrosity, now at least five
times larger than 15 to 20 years ago, could tip over and crush
the financial system with sufficient triggered provocation. Fed
Governor Poole in 2003 stated his concern that failure by Fanny
Mae could set off an economic meltdown, as is capital foundation
was entirely inadequate. Now Roach of Morgan Stanley sees threats
to the USDollar and the need for fast rising interest rates as
a trigger for economic catastrophe. We seem to live on the edge
constantly.
7) Post-accident
attribution accident to a 'root cause' is fundamentally wrong.
Because overt
failure requires multiple faults, there is no isolated 'cause'
of an accident. There are multiple contributors to accidents.
Each of these is necessary insufficient in itself to create an
accident. Only jointly are these causes sufficient to create
an accident. Indeed, it is the linking of these causes together
that creates the circumstances required for the accident. Thus,
no isolation of the 'root cause' of an accident is possible.
The evaluations based on such reasoning as 'root cause' do not
reflect a technical understanding of the nature of failure but
rather the social, cultural need to blame specific, localized
forces or events for outcomes.
Debate rages over the root
cause of the Great Depression. Was it too much debt and leverage
and speculation? Was it too little response with lower interest
rates and floods of liquidity? This accident stands as the event
of extreme primacy studied, explained, and revised according
to political motives and agenda pushed upon policy makers. It
might be argued that the USA does not bother to analyze accidents
much at all. Reform conflicts with the power structure and the
ruling elite. We simply move to the next accident merrily, and
boast of flexible response.
8) Hindsight
biases post-accident assessments of human performance.
Knowledge of
the outcome makes it seem that events leading to the outcome
should have appeared more salient to practitioners at the time
than was actually the case. This means that ex post facto accident
analysis of human performance is inaccurate. The outcome knowledge
poisons the ability of after-accident observers to recreate the
view of practitioners before the accident of those same factors.
It seems that practitioners "should have known" that
the factors would "inevitably" lead to an accident.
(Hindsight bias remains the primary obstacle to accident investigation,
especially when expert human performance is involved).
In hindsight, most analyses
of past accidents appear to this analyst to be justified as a
small price to pay for our capitalist system, chock full of opportunity,
freedom to invest and apply credit, and a remarkable showcase
to our innovation and flexibility. Our official analyses seem
to be corrupted by the current agenda and by those in power to
influence and dictate policy. We are too busy inflating, speculating,
and building the next financial contraptions to be bothered with
much objective expert post-accident analysis at all. Greater
future opportunity lies over the horizon. Why waste time with
the past?
9) Human
operators have dual roles: as producers & as defenders against
failure.
The system practitioners
operate the system in order to produce its desired product and
also work to forestall accidents. This dynamic quality of system
operation, the balancing of demands for production against the
possibility of incipient failure is unavoidable. Outsiders rarely
acknowledge the duality of this role. In non-accident filled
times, the production role is emphasized. After accidents, the
defense against failure role is emphasized. At either time, the
outsider's view misapprehends the operator's constant, simultaneous
engagement with both roles.
Are the Federal Reserve and
Chairman Greenspan the cause of the problems or the primary agents
of remedy? Most benefiting participants see them as agents of
remedy. Most victims see them as causes of the problem. Greenspan
ignored his own warning of irrational exuberance in 1996, yet
is assigned little blame for the greatest stock bust in world
history only four years later. The same villain & hero roles
go with Franklin Raines of Fanny Mae (still there) and with John
Meriwether of LTCM (in new hedge fund), even Robert Rubin of
the Dept of Treasury (now at Citigroup). On a systemic level,
the same goes for the Bank of Japan which perpetuates the grand
imbalances. Toss in some villainous practices, not people, such
as zero percent finance deals. They led to sustained retail sales
but also to gargantuan trade gaps. Also, the wizards controlling
vast derivative gears on bonds and currencies tinker with their
levers, contribute to the problem, yet are called upon to offer
counsel and to enact the cures.
10) All
practitioner actions are gambles.
After accidents,
the overt failure often appears to have been inevitable and the
practitioner's actions as blunders or deliberate willful disregard
of certain impending failure. But all practitioner actions are
actually gambles, that is, acts that take place in the face of
uncertain outcomes. The degree of uncertainty may change from
moment to moment. That practitioner actions are gambles appears
clear after accidents; in general, post hoc analysis regards
these gambles as poor ones. But the converse: that successful
outcomes are also the result of gambles; is not widely appreciated.
When Greenspan bailed out LTCM
in 1998, he took a gamble that failed. When Greenspan released
huge liquidity in the face of the new millennium Y2K bug threat,
he took a gamble that failed. When Greenspan took down interest
rates in 2001, he took a gamble that is the process of failing,
not fully recognized yet. When he compounded the policy by urging
down the long-term rates, he doubled down on the gamble, only
to double the ultimate damage. Outcomes were indeed uncertain.
Permitting bond & housing bubbles seemed the desired and
urged approach at the time. After these bubbles give off gas,
the perception on the policy will not be so forgiving. On the
other hand, the Resolution Trust Corporation which gathered,
sold, and administered the bankrupt dissolved banks from the
S&L debacle in 1989 turned out to be an excellent risk and
successful cleanup. It made Bill Siedman's career, who headed
the Federal Deposit Insurance Corporation. At the local level,
people gamble with their home equity, their savings, and their
pensions.
11) Actions
at the sharp end resolve all ambiguity.
Organizations
are ambiguous, often intentionally, about the relationship between
production targets, efficient use of resources, economy and costs
of operations, and acceptable risks of low and high consequence
accidents. All ambiguity is resolved by actions of practitioners
at the sharp end of the system. After an accident, practitioner
actions may be regarded as 'errors' or 'violations' but these
evaluations are heavily biased by hindsight and ignore the other
driving forces, especially production pressure.
Changes in Fed policy, to begin
tightening cycles, to begin easing cycles, to enable high profile
rescues, these are actions at the sharp end. There is no ambiguity
when interest rates change course. If the Fed is forced to raise
interest rates sharply in response to a USDollar in freefall,
again actions would contain little ambiguity. It is my firm belief
that the Fed would, however, attempt to muddy the waters of perception
with claims of a stronger US Economy at the same time of policy
change. Actions taken by prosecutors directed at fraud are unambiguous.
Actions taken to remove drug products from the marketplace are
also very clear. Again, objective examination of root violations
is sorely lacking. Watch the FDA process to change not at all.
12) Human
practitioners are the adaptable element of complex systems.
Practitioners
and first line management actively adapt the system to maximize
production and minimize accidents. These adaptations often occur
on a moment by moment basis. Some of these adaptations include:
(1) Restructuring the system in order to reduce exposure of vulnerable
parts to failure. (2) Concentrating critical resources in areas
of expected high demand. (3) Providing pathways for retreat or
recovery from expected and unexpected faults. (4) Establishing
means for early detection of changed system performance in order
to allow graceful cutbacks in production or other means of increasing
resiliency.
The Federal Reserve has reportedly,
in clandestine fashion, taken over JPMorgan and its dangerous,
potentially catastrophic derivative book. The merger agreement
between JPMorgan and the giant Japanese bank Sumitomo in 2003
constituted a restructure along the lines of item #1, a marriage
ordered complete with a $1500 million cash dowry. The Dept of
Treasury and SEC are in the process of assisting Fanny Mae with
its mortgage books. The high demand for mortgage financing requires
a concentration of resources to sustain the important housing
market along the lines of item #2. Without the housing boom,
the US Economy would go into deep recession. Big dangers currently
loom in bogus economic reporting (item #3) and early detection
for cutbacks (item #4). A pathway for retreat is difficult with
false aggregate data, which typically justifies current policy
and overwhelms the need for prudent cutback at all. Therein lie
great risks.
13) Human
expertise in complex systems is constantly changing.
Complex systems
require substantial human expertise in their operation and management.
This expertise changes in character as technology changes but
it also changes because of the need to replace experts who leave.
In every case, training and refinement of skill and expertise
is one part of the function of the system itself. At any moment,
therefore, a given complex system will contain practitioners
and trainees with varying degrees of expertise. Critical issues
related to expertise arise from (1) the need to use scarce expertise
as a resource for the most difficult or demanding production
needs and (2) the need to develop expertise for future use.
When Veneroso departed his
role as consultant to Western central bankers, great expertise
was lost in managing the gold versus currency versus bonds complex.
When former Treasury Sec'y Rubin left his role in managing the
USDollar, great expertise was lost. John Snow is but a shadow
of Rubin in specialty skills. His predecessor O'Neil was replaced
due to competence, honesty, and outspokenness. The USDollar has
begun its frightening decline. When professionals accept new
jobs in the lucrative hedge fund business, and leave behind their
speculative desks on Wall Street, again expertise is lost. Responsibility
for juggling in the great game falls on less skilled, less experienced,
and less connected individuals. Variation in competence grows
tremendously, putting the system at greater risk to respond.
14) Change
introduces new forms of failure.
The low rate
of overt accidents in reliable systems may encourage changes,
especially the use of new technology, to decrease the number
of low consequence but high frequency failures. These changes
maybe actually create opportunities for new, low frequency but
high consequence failures. When new technologies are used to
eliminate well understood system failures or to gain high precision
performance they often introduce new pathways to large scale,
catastrophic failures. Not uncommonly, these new, rare catastrophes
have even greater impact than those eliminated by the new technology.
These new forms of failure are difficult to see before the fact;
attention is paid mostly to the putative beneficial characteristics
of the changes. Because these new, high consequence accidents
occur at a low rate, multiple system changes may occur before
an accident, making it hard to see the contribution of technology
to the failure.
Derivative contracts, heavily
used in risk offload, stand as the quintessential high risk financial
security instrument in today's financial world. With such new
technology comes low frequency but high consequence failures.
Mortgage bond derivatives known as real estate mortgage investment
conduit (REMIC) apply leverage to contain mortgage rates. They
employ "strips" and "floaters" which conjure
up images of nightclub bondage more than financial securities.
Years ago, the mortgage backed security (MBS) was a new device
to sell into the bond market large portfolios of homeowner mortgages.
The technology has advanced. Numerous other examples exist as
change occurs, crises are averted, and new devices become invented.
The newest device is the gold exchange traded fund (ETF). Could
it assist in ushering the arrival of the upcoming USDollar crisis?
15) Views
of 'cause' limit the effectiveness of defenses against future
events.
Post-accident
remedies for "human error" are usually predicated on
obstructing activities that can "cause" accidents.
These end-of-the-chain measures do little to reduce the likelihood
of further accidents. In fact that likelihood of an identical
accident is already extraordinarily low because the pattern of
latent failures changes constantly. Instead of increasing safety,
post-accident remedies usually increase the coupling and complexity
of the system. This increases the potential number of latent
failures and also makes the detection and blocking of accident
trajectories more difficult.
In the wake of Black Monday,
S&L debacle, Mexican Peso crisis, Asian Meltdown, LTCM fiasco,
Tech/Telecom stock bust, as well as the Great Depression, measures
were put into place to protect the system. Little resistance
is laid in the path of new tinkering to install safety measures.
Coming in the form of leveraged futures contracts, bond derivatives,
exotic contracts linking at least two commodities, government
teams for market reaction, trade protection, such safety measures
surely increase the coupling and complexity in hidden ways. Detection
of accident pathways is rendered almost impossible.
16) Safety
is a characteristic of systems and not of their components.
Safety is an
emergent property of systems; it does not reside in a person,
device or department of an organization or system. Safety cannot
be purchased or manufactured; it is not a feature that is separate
from the other components of the system. This means that safety
cannot be manipulated like a feed stock or raw material. The
state of safety in any system is always dynamic; continuous systemic
change insures that hazard and its management are constantly
changing.
The mere claim of risk assessment
in today's complex economic and financial system is not possible.
Gold miner firms hire external consultants just to assess their
own risk from hedge books, otherwise known as derivatives. The
Dept of Treasury in all likelihood was unable to assess the risk
or even the current status of the Fanny Mae derivative book contraptions.
Warren Buffet required two years to assess the risk and financial
status of his acquired General Re insurance firm, beset by derivatives
which he himself labeled as "financial sewage." Safety
is the byproduct of managed risk. It is not measurable, nor can
it be manipulated with assurance of safety. Our system reacts.
It must be constantly administered and managed. External change
is too regular and constant. Breakdowns are too regular and constant.
Unwise human behavior is too regular and constant.
17) People
continuously create safety.
Failure free
operations are the result of activities of people who work to
keep the system within the boundaries of tolerable performance.
These activities are, for the most part, part of normal operations
and superficially straightforward. But because system operations
are never trouble free, human practitioner adaptations to changing
conditions actually create safety from moment to moment. These
adaptations often amount to just the selection of a well-rehearsed
routine from a store of available responses; sometimes, however,
the adaptations are novel combinations or de novo creations of
new approaches.
When my newsletter was contemplated,
a concern rose over adequate material to cover each and every
month. A light bulb went on. Ongoing events require our wizards
to provide a safe environment for commerce and investment, as
change unfolds day to day. My new online business is free to
analyze the steady parade of crises, poor analysis, vested interest
promotion, widespread deception, and the burlesque that has become
our economy. As policy makers and captains of industry work to
keep the system within the boundaries of tolerable performance,
the disorder grows and safety grows more elusive. There is plenty
to write about and analyze, even as investment opportunity grows
in magnificent fashion. My own research is part of the adaptation.
18) Failure
free operations require experience with failure.
Recognizing
hazard and successfully manipulating system operations to remain
inside the tolerable performance boundaries requires intimate
contact with failure. More robust system performance is likely
to arise in systems where operators can discern the "edge
of the envelope". This is where system performance begins
to deteriorate, becomes difficult to predict, or cannot be readily
recovered. In intrinsically hazardous systems, operators are
expected to encounter and appreciate hazards in ways that lead
to overall performance that is desirable. Improved safety depends
on providing operators with calibrated views of the hazards.
It also depends on providing calibration about how their actions
move system performance towards or away from the edge of the
envelope.
That should not be a problem.
Plenty of experience with failure to go around.
We as a collective nation tend to minimize the risks, falsely
identify the boundaries.
Is that the edge of the envelope or the edge to the abyss ???
Prepare your own life, and that of your family, by building your
own safety pill box.
Ignore the mainstream. Purchase mining and energy stocks, or
physical supplies.
The coming storm will provide real shock & awe. So be ready.
Listen to those who can guide you through the inevitable storm
which lies directly ahead.
For a free gold report from
the Certified Gold Exchange, click
here, fill out, submit. You can learn about gold investment
products like coins, and how to develop a collection.
Jim Willie
Archives
Dec 6, 2004
Jim Willie
CB is the editor of the "HAT TRICK LETTER"
Visit his website: Golden Jackass
Subscribe: Hat
Trick Letter
Jim is a statistical
analyst in marketing research and retail forecasting. He holds
a PhD in Statistics. His career has stretched over 23 years.
He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials.
321gold
Inc
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