Mr. Chang uses finance as one of his examples where complexity threatens an endless series of crises.
Complexity is one of the methods that Wall Street uses to introduce opacity into the financial system. Opacity that allows Wall Street to profit from the resulting mis-pricing of risk. Opacity that allows Wall Street to dodge responsibility for the consequences of this mis-pricing of risk and mis-allocation of capital.
The problem is even more serious in the financial sector, which these days deals in assets that involve households (in the case of mortgages), companies and governments all over the world. On top of that these financial assets are combined, sliced and diced many times over, to produce highly complicated "derivative" products.
The result is an exponential increase in complexity.
Andy Haldane, executive director of financial stability at the Bank of England, once pointed out that in order to fully understand a CDO2 – one of the more complicated financial derivatives (but not the most complicated) – a prospective investor needs to absorb more than a billion pages of information.
I have come across bankers who confessed that they had derivative contracts running to a few hundred pages, which they naturally didn't have time to read.
Given this level of complexity, financial companies have come to rely heavily on countless others – stock analysts, financial journalists, credit-rating agencies, you name it – for information and, more importantly, making judgments.
This means that when something goes wrong, they can always blame others: poor people in Florida who bought houses they cannot afford; "irresponsible" foreign governments; misleading foreign stock analysts; and, yes, incompetent credit-rating agencies.
The result is an economic system in which no one in "responsible" positions takes any serious responsibility. Unless radical action is taken, we will see many more financial crises and corporate scandals in the years to come.
But what happens if there is opacity and there is no information to independently assess?
Then we have the situation with the 'black box' banks where at the start of the financial crisis even the banks could not tell which banks are solvent and which are not. In this case, taxpayers bailout market participants for the regulators failure to ensure transparency.