From The Wall Street Journal, by Scott Patterson, 6/2/23,  When Markets Melt Down, These Traders Cash In,

Market crashes. Pandemics. Terrorist attacks. Riots. Megafires. Superstorms. Extreme, destructive, often deadly events seem to be happening across the planet with greater frequency—and greater harm. They happen suddenly and strike widely. The smallest event can cause them, the proverbial flapping of a butterfly’s wings whipping up tornadoes across continents.

A chillingly perverse result of their increasing frequency is that such events are becoming more predictable in certain ways. They aren’t black swans that sweep in out of the blue. They’re what Taleb calls gray swans—devastating events that are all too foreseeable.

Taleb has argued that our increasingly unstable world is the paradoxical result of humankind’s efforts to control it with technology, quantitative models, and ubiquitous just-in-time optimization, resulting in an ever-more-complex, human-built, fragile society susceptible to shocks. Extreme events “are necessarily increasing as a result of complexity, interdependence between parts, globalization and the beastly thing called ‘efficiency’ that makes people now sail too close to the wind,” he wrote in his 2012 book “Antifragile.”

As globalization expands, connectivity accelerates. Complexity breeds complexity, and speed breeds speed. Social networks spread news—and conspiracy theories—like a virus. Rapid air travel can cause infections that might have died out in a small village to explode across borders.

Financial markets, and the economies that depend on them, have become increasingly complex, unstable, and prone to crashes. In the early 2000s, economists such as Ben Bernanke, who would later become chairman of the Federal Reserve, claimed that the global economy had entered a so-called Great Moderation. The steady hand of economic technicians, the spread of derivatives and other products of Wall Street’s financial engineers, known as quants, and low inflation meant the world was set to enjoy untold prosperity, the gift of not-too-hot-not-too-cold, centrally managed perpetual growth. Then came 2008, when the collapse of the U.S. subprime mortgage market ignited a global economic panic attack. The loss of hundreds of billions of dollars in mortgages spread like a contagion through derivatives markets, leading to trillions in losses.


In A Demon of Our Own Design,  Richard Bookstaber (2007) made a similar observation that the combination of complexity and tightly coupled systems increased the severity of crashes.  Small firewalls that contained corrections were being dismantled, leading to larger, far more damaging crashes.  Part of this was the result of greater connections from travel and communications, but a great part is the result of central powers believing they can control macro markets when they cannot. There is just too much dispersed and unarticulated knowledge for anyone or any administrative bureaucracy to accomplish this.

“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with most unnecessary attention but assume an authority which could safely be trusted to no council and senate whatever, and which would nowhere be so dangerous as in the hands of man who have folly and presumption enough to fancy himself fit to exercise it. “-Adam Smith

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”-Friedrich von Hayek