A disaster is usually triggered by some previously unquestioned assumption abruptly breaking down. The 2008 monetary disaster for instance, sprang from the idea that the US would by no means undergo a nationwide decline in housing costs.
However the true drawback isn’t the preliminary mistake.
EVERYTHING HAS CHANGED
It’s the ripple impact – what occurs when that first false assumption begins to undermine increasingly more of our bedrock beliefs.
Because of this, in a disaster, usually unrelated belongings begin to all drop collectively. In 2008, the essential cascade failure got here when Lehman Brothers’ collapse prompted a cash market fund referred to as Reserve Major to lose US$785 million. That shock led buyers, who had assumed that cash market funds have been basically riskless, to stampede away from them, shrinking banks’ entry to credit score by roughly US$1 trillion and making the scenario infinitely extra harmful.
Crises reveal and create new linkages between occasions, breaking the causal chains that had beforehand guided our actions. Earlier than 2008, nobody would have thought there was a relationship between cash market funds and actual property costs.
