2. Too much computer
We can't assume that adding more technology to our lives will make us safer. I wrote about the human-computer nexus in the context of aviation this week; Axios' Steve LeVine wrote about it in the context of surgery. In both cases, giving humans less work to do risks making them less competent, with potentially catastrophic consequences.
In finance, the most catastrophic case of "too much computer" was the Basel II international capital adequacy regime.
- Central banks are the pilots of the financial system, tasked with keeping banks within the envelope of safety. The old tools — as laid out in the Basel I regime — were implemented in 1988. They were crude, if broadly effective, and required banks to increase the amount of capital they had according to how risky the loans on their books were.
- When Basel I was replaced by Basel II in 2004, the tools became so complex that human regulators could no longer intuit or understand the computer outputs they were looking at. At that point, they were no longer really in control.
- After the financial crisis, central bankers replaced Basel II with Basel III, which includes a number of simple ratios that banks need to meet and that can't be gamed. Computers are still used, but human regulators have more assurance that they broadly understand and are in control of how much capital banks need.
Flashback: The flash crash of May 2010, when the U.S. stock market plunged by 9% in a matter of minutes for no particular reason, was also caused by computers. It could happen again. The best way to prevent a much more damaging repeat would be to severely limit high-frequency trading, where investors buy and sell stocks at speeds that far exceed the limits of human comprehension.
Cryptocurrencies have been plagued since their inception by the unintended consequences of giving up human oversight and leaving it all to preset digital rules. It turns out that most humans like the safety of knowing that there's a human common-sense component to their currency stack, which is one big reason why cryptocurrencies have seen very little real-world adoption.
The catch: Not all areas of finance can be tackled with low-tech solutions. When it comes to cybersecurity, the only way to effectively fight off black-hat hackers is to hire even more sophisticated white-hat defenders. That particular technology arms race isn't going to end anytime soon.
The bottom line: Finance has been reliant on opaque technology for longer than just about any other sector of the economy. That reliance was in large part a cause of the global financial crisis. Perhaps regulators in aviation, autonomous vehicles and even medicine should talk more to their financial counterparts and learn some of the lessons of 2008.