–In electricity, reliability is driven by dread associated with loss of containment at a nuclear generator or islanding of the entire electric transmission grid. Major irreplaceable dams, whether upriver of settlement or not, are not to be overtopped. Nuclear explosions occur, dams are overtopped, and grids do separate and island, but these events are rare–rare because of their management beyond technology and design–and when they do happen they serve to reinforce their must-never-happen dread.
–In contrast, financial services have “should-never-happen events”—bank runs should be avoided and financial crises shouldn’t happen. The standard of operating reliability is not one of precluding financial crises from ever happening, but rather of treating these crises (1) as avoidable though not always, or (2) as inevitable (“busts are part of market capitalism”) or at least (3) compensable after the fact (as in the pre-2008 assurance that it’s better to clean up after a financial bubble bursts than trying to manage it beforehand).
–Not having reliability of financial services based on must-never-happen events has major consequences for economic stability and growth.
At the macro level, there are two different standards of economic reliability: The retrospective standard holds the economy is performing reliably when there have been no major shocks or disruptions from then to now. The prospective standard holds the economy is reliable only until the next major shock.
Why does the difference matter? In practical terms, the economy is prospectively only as reliable as its critical infrastructures are reliable, right now when it matters for economic productivity. In fact, if economy and productivity were equated only with recognizing and capitalizing on retrospective patterns and trends, economic policymakers and managers could never be reliable prospectively.
–For example, a retrospective orientation to where we are today is to examine economic and financial patterns and trends since, say, 2008; if so, a prospective standard would be to ensure that–at a minimum–the 2008 financial recovery could be replicated, if not bettered, for the next global financial crisis.
The problem with the latter–do no worse in the financial services sector than what happened in the 2008 crisis–is that benchmark would have to reflect a must-never-happen event for the sector going forward.
What, though, are the chances it would be the first-ever must-never-happen event among all of that sectors’ should-never-happen ones?