you can’t fight complexity with complexity

Andy Haldane’s speech at Jackson Hole today, The Dog and the Frisbee, is the single best speech by a regulator or financier anywhere in 2012.

It is a splendid application of complexity science to the field of financial regulation.  It is a succinct analysis of why “more begets more,” why big finance is leading us into a mess and big regulation into an even bigger one, and why simpler approaches would be more effective.  Mr Haldane’s speech demonstrates in a nutshell why our efforts to reform financial regulation, be it Dodd-Frank, Basel III or Vickers, have become a convoluted mess.

Suffice it to quote his conclusion:

Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.

Haldane’s speech is essential reading.  He says it better than anyone else so far.

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