economist Sidney Homer at the time. ‘It is painful by definition, and it
can even break bones.’[81]
The 2008 crisis wasn’t the first time Andy Haldane had thought
about contagion in financial systems.[82] ‘I remember back in 2004/5,
writing a note about us having entered the era of “super-systemic
risk” as a result of these sorts of infections.’ His note suggested that
the financial network might be robust in some situations and
extremely fragile in others. The idea was well-established in ecology:
the structure of a network might make it resilient to minor shocks, but
the same structure could also leave it vulnerable to complete collapse
if put under enough stress. Think about a team at work. If most
people are doing well, weaker members can get away with mistakes
because they are linked to high performers. However, if most of the
team are struggling, the same links will instead drag strong members
down. ‘The basic point was that all this integration did indeed reduce
the probability of mini-crashes,’ Haldane said, ‘but increased the
probability of a maxi-crash.’
It may have been a prescient idea, but it didn’t spread very far.
‘That note didn’t really go anywhere unfortunately,’ he said, ‘until the
big one came.’ Why didn’t the idea take off? ‘It was hard to spot any
examples of such systemic risk at the time. It appeared to be a very
flat ocean at that point.’ That would change in autumn 2008. After
Lehman Brothers collapsed, people across the banking industry
started thinking in terms of epidemics. According to Haldane, it was
the only way to explain what had happened. ‘You couldn’t tell a story
about why Lehman had brought the financial system down without
telling a contagion story.’
I a list of network features that could amplify
contagion, you’d find that the pre-2008 banking system had most of
them. Let’s start with the distribution of links between banks. Rather
than connections being scattered evenly, a handful of firms
dominated the network, creating massive potential for
superspreading. In 2006, researchers working with the Federal
Reserve Bank of New York picked apart the structure of the US
Fedwire payment network. When they looked at the $1.3 trillion of