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The Lessons Of Flight Engineering For Financial-Market Liquidity

Karen Petrou's memorandum to Federal Financial Analytics clients on the lessons of flight engineering for financial-market liquidity.

TO: Federal Financial Analytics Clients

FROM: Karen Shaw Petrou

DATE: August 21, 2015

When I studied organizational theory at MIT, I unsurprisingly learned to think like an engineer. One important lesson: truly complex systems cannot fail from single causes because built-in redundancy prevents this. Instead, complex systems fail for complex reasons. Another engineering lesson: if the engine is coughing, it’s broken even if none of the red lights is blinking – the lights could be your problem, not the engine. All of this may seem intuitively obvious, but the vigorous and sometimes even vicious debate over market liquidity seems to be missing both of these points.

In the last few weeks, we have had various treatises on several liquidity near-misses – think of these close calls as sputtering engines. FSOC provided us with lots of cool charts that concluded nothing much other than that lots more charts with still more data are needed. In short, fly on while we think about rewriting the manual. An...