May 122010

Amazing lead paragraph by Kara Scannell and Fawn Johnson at the WSJ. It’s in an article titled, “Schapiro: Web of Rules Aided Fall.”

Regulators haven’t found evidence of a single cause for the May 6 stock-market plunge, but the lack of unified rules among stock exchanges played a role, Securities and Exchange Commission Chairman Mary Schapiro said Tuesday.

There is not a single sentence in the entire article to explain how a “lack of unified rules among stock exchanges” could have played a role. I suppose mere reporters don’t get to ask questions at a congressional hearing, but surely they should have reported on how the congressional committee members let that comment go by without a word of explanation. Or perhaps there was an explanation, in which case Scannel and Johnson should have told us about it.

Why make a big deal out of this? Well, I am skeptical that a lack of unified rules could have caused a lack of stability. It’s just not the way large, complex systems usually work. Usually there is stability in diversity, not in uniformity.

I tend to think of the parallels between economic systems and biological ecosystems. Note how the headline used the word “web.” Webs are usually good for stability. If this is a rare exception, it would be worth knowing about it.