Today, as financial markets become ever more complex, unanticipated ripple effects are more common—think of the havoc wrought a couple of weeks ago when the activities of one rogue French trader came to light. In the past thirty years, thanks to the combination of globalization, deregulation, and the increase in computing power, we have seen an explosion in financial innovation. This innovation has had all kinds of benefits—making cheap capital available to companies and individuals who previously couldn’t get it, allowing risk to be more efficiently allocated, and widening the range of potential investments. On a day-to-day level, it may even have lowered volatility in the markets and helped make the real economy more stable. The problem is that these improvements have been accompanied by more frequent systemic breakdowns. It may be that investors accept periodic disasters as a price worth paying for the innovations of modern finance, but now is probably not the best time to ask them about it.
