Jamie Dimon's Forest Fire Defense

Before my vacation, Elizabeth Warren's piece in the WSJ struck me oddly.  She says, among other things:

J.P. Morgan CEO Jamie Dimon recently explained this brave new world, saying that crises should be expected "every five to seven years."

He is wrong. New laws that came out of the Great Depression ended 150 years of boom-and-bust cycles and gave us 50 years with virtually no financial meltdowns. The stability ended as we dismantled those laws and failed to replace them with new laws that reflected modern business practices.

I'm confident she's a great law professor, otherwise she wouldn't be at Harvard.  I'm uncertain I want her to continue attempting to regulate financial markets, (she's in charge of TARP.)  As Arthur Levitt writes in today's WSJ: "In financial markets, when people take risks and don't anticipate failure, they take greater risks and the resulting failure becomes far more damaging."

This reminds me a lot of forest fires.  If you're interested, I suggest you read about forest fire doctrine here, here and here.  The basic parallel follows because forest fires carry incredible risk, especially in populated areas.  However, we cannot effectively fight all forest fires, and fighting many of them increases the risk of catastrophically large fires.  Fuel loads change, different parts of trees burn hotter, etc.

Jamie Dimon's statement parallels wildfire doctrine: Smaller disasters, periodically prevent catastrophic disasters in the long run.  Why?  First, small disasters work the building risk out of the system.  Second, they remind risk managers that bad things happen, and they shouldn't get complacent.