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September 29, 2008
Decoupled Decoupling, Global Contagion, and Normal Accidents
The boots have been put to the decoupling hypothesis, with Europe now in full we've-got-bailouts-too panic, and Asian only slightly behind. People forget, but European banks are, on average, materially more levered than their U.S. counterparts, and, as a result, it doesn't take much to tip them over the liquidity edge.
It is a classic normal accident, in Charles Perrow's terms, with a confluence of actually fairly obvious foibles conspiring together to create an altogether predictable problem, but one that cannot be straightforwardly stopped. To turn to wildfire ecology, my favorite reference discipline during market crises, some of the largest fires just have to burn themselves out.
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