Financial crises are becoming more frequent as markets and the rules that govern them grow ever more complex. New research suggests that this is no coincidence -- and that a simpler system would be a lot more resilient.
Forward-thinking officials have long argued that financial regulation needs to be simpler. In his much-quoted speech "The Dog and the Frisbee," Andrew Haldane of the Bank of England notes that dogs catch frisbees not by making complex aerodynamic calculations, but by relying on simple rules of thumb -- for example, running at a speed that keeps the angle of gaze to the object roughly constant. By analogy, he suggested, regulators might do well to eschew ever more intricate calculations of the risks in banks’ portfolios, and instead aim for rules that would be easier to understand and less likely to go badly wrong.