In the fall of 2008, I gave a speech in San Francisco to a conference of fund managers, loan brokers, and bankers who were just beginning to realize the consequences of the collapse of the sub-prime mortgage and exchange-traded derivatives markets. They came eager to hear from quantitative wizards about the next trick they should try to continue to elevate their wealth. I opened my speech with this sentence: “Someone you know, someone you love, will be hurt because of what we have done.”

I went on to explain the extent of the systemic failure that had been loaded into the U.S. economy by a combination of industry and government actions. I ended with a prediction for some of the people in that room: It would be their last year working in the finance industry; that much like the collapse of Dot Com One in Silicon Valley a decade earlier, many of their firms would collapse and never come back.

For those who remained, onerous government regulation and compliance controls were inevitable and would constrain most of the wild profit-making practices upon which the conference attendees had enjoyed opulent lives. The end of the presentation was met with stunned silence and painful realization that their lives, and the lives of the people who had trusted them, would change dramatically. A systemic failure of the financial system — what many people called a rare and unpredictable “Black Swan” event had hatched.

Anatomy of a Manmade Disaster

A systemic financial disaster differs from other calamities in that everything in the infrastructure keeps running. What breaks is the ability of the population to afford to access the infrastructure. At its extreme, jobs, incomes, and even entire swaths of industries disappear for a statistically significant portion of the population, causing economic displacement. The power company remains, but you can’t afford to pay your bills. Costs of necessities, which may or may not have risen, become unreachable because, if you’re one of the ones affected by the crisis, you don’t have the money. People lose careers. Families

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