London bridge

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 ●  Reghuram Rajan, Hyun Song Shin                                         [ ]

[pp.107-108]
     "History," [Greenspan] noted, "has not dealt kindly with the aftermath of protracted periods of low-risk premiums."

     <one paragraph remove>
     In hindsight, many have pointed to a paper that International Monetary Fund chief economist Reghuram Rajan presented as a rare moment of clarity at the 2005 conference.  Rajan indeed had an astute understanding of the ways in which the financial industry, with misguided compensation policies that encouraged risk-taking, was making the world a more dangerous place: Bankers were paid big bonuses to making money in the short run even if they were betting poorly in the long run.  [And] he identified ... one portion of what could go horribly wrong.
     It was Hyun Song Shin, then a professor at the London School of Economics, who in response to Rajan's paper most accurately portrayed the state of the global economy.
     "I'd like to tell you about the Millennium Bridge in London," he began.  In order to celebrate the advent of the year 2000, the British built a stunning new pedestrian bridge across the Thames.  Its lateral-suspension design precluded the need for clunky-looking columns, making it a study in engineering elegance.
     "The bridge was opened by the queen on a sunny day in June," Shin continued.  "The press was there in force, and many thousands of people turned up to savor the occasion. However, within the moments of the bridge's opening, it began to shake violently."  The day it opened, the Millennium Bridge was closed.  The engineers were initially mystified about what had gone wrong.  Of course it would be a problem if a platoon of soldiers marched in lockstep across the bridge, creating sufficiently verticle vibration to produce a swaying effect.  The nearby Albert Bridge, built more than a century earlier, even features a sign directing marching soldiers to break step rather than stay together when crossing.  But that's not what happened at the Millennium Bridge.  "What is the probability that a thousand people walking at random will end up walking exactly in step, and remain in lockstep thereafter?" Shin asked.  "It is tempting to say, 'Close to zero.'"
     But that's exactly what happened.  The bridge's designers had failed to account for how people react to their environment.  When the bridge moved slightly under the feet of those opening-day pedestrians, each individual naturally adjusted his or her stance for balance, just a little bit--but at the same time and in the same direction as every other individual.  That created enough lateral force to turn a slight movement into a significant one.  "In other worlds," said Shin, "the wobble of the bridge feeds on itself. The wobble will continue and get stronger even though the initial shock--say, a small gust of wind--had long passed. . . . Stress testing on the computer that looks only at storms, earthquakes, and heavy loads on the bridge would regard the events on the opening day as a 'perfect storm.' But this is a perfect storm that is guaranteed to come every day."        
     In financial markets, as on the Millennium Bridge, each individual player--every bank and hedge fund and individual investor--reacts to what is happening around him or her in concert with other individuals.  When the ground shifts under the world's investors, they all shift their stance.  And then they all shift their stance in the same direction at the same time, it just reinforces the initial movement.  Suddenly, the whole system is wobbling violently.
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     (Irwin, Neil (2013), The Alchemists, the penguin press, new york, 2013 )
(The Alchemists : three central bankers and a world on fire, Neil Irwin, pp.107-108)
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