quite who owed what to whom,’ Haldane said. It didn’t help that there
were numerous, often hidden, loops in the wider network, creating
multiple routes of transmission from Lehman to other companies and
markets. What’s more, these routes could be very short. The
international financial network had become a smaller world during the
1990s and 2000s. By 2008, each country was only a step or two
away from another nation’s crisis.[86]
In February 2009, investor Warren Buffett used his annual letter to
shareholders to warn about the ‘frightening web of mutual
dependence’ between large banks.[87] ‘Participants seeking to dodge
troubles face the same problem as someone seeking to avoid
venereal disease,’ he wrote. ‘It’s not just whom you sleep with, but
also whom they are sleeping with.’ As well as putting supposedly
careful institutions at risk, Buffett suggested that the network structure
could also incentivise bad behaviour. If the government needed to
step in and help during a crisis, the first companies on the list would
be those that were capable of infecting many others. ‘Sleeping
around, to continue our metaphor, can actually be useful for large
derivatives dealers because it assures them government aid if trouble
hits.’
Given the apparent vulnerability of the financial network, central
banks and regulators needed to understand the 2008 crisis. What
else had been driving transmission? The Bank of England had
already been working on models of financial contagion pre-crisis, but
2008 brought a new, real-life urgency to the work. ‘We started using
them in practice when the crisis broke,’ Haldane said. ‘Not just for
making sense of what was going on, but more importantly for what
we might do to stop it happening again.’
W money to another, it creates a tangible link
between the two: if the borrower goes under, the lender loses their
money. In theory, we could trace this network to understand the
outbreak risk, just as we can for STIs. But there’s more to it than that.
Nim Arinaminpathy has pointed out that networks of loans were just
one of several problems in 2008. ‘It’s almost like ,’ he said. ‘You
can have transmission through sexual contacts, as well as needle