A system is said to exhibit resilient dynamism if it can continue to function in the face of threats and withstand, adapt and recover from shocks.
An example of a critical system that exhibits resilient dynamism is a financial systems based on the FDR Framework.
Regular readers know that the FDR Framework is based on the combination of the philosophy of disclosure and the principle of caveat emptor (buyer beware). It is this combination that creates resilient dynamism.
Under the FDR Framework,
- the government is responsible for ensuring that market participants have access to all the useful, relevant information in an appropriate, timely manner so they can assess and make a fully informed decision; and
- market participants are held responsible for all gains and losses on their exposures by the principle of caveat emptor and therefore they have an incentive to use the disclosed information.
When the combination of disclosure and caveat emptor is present, as it has been for the global stock markets throughout the current financial crisis, the markets have continued to function. While prices dropped in 2008/2009, there were both buyers and sellers in the market and no need for direct government intervention.
When the combination of disclosure and caveat emptor is not present, as it has been for opaque structured finance securities and 'black box' banks throughout the current financial crisis, the market freezes and there has been a need for direct government intervention.
The difference between a financial system that exhibits resilient dynamism and a financial system that doesn't is opacity.
Without disclosure, investors do not have all the useful, relevant information. As a result, they are not investing, but rather blindly betting. By definition, blindly betting is not the characteristic of a financial system exhibiting resilient dynamism.
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