Distress in one area of financial markets spread to other seemingly unrelated areas of financial markets. In fact, the mathematics of financial contagion are exactly like the mathematics of disease or virus contagion. That’s why they call it contagion. One resembles the other in terms of how it’s spread.

What are examples of the complexity?

One of my favorites is what I call the avalanche and the snowflake. It’s a metaphor for the way the science actually works but I should be clear, they’re not just metaphors. The science, the mathematics and the dynamics are actually the same as those that exist in financial markets.

Imagine you’re on a mountainside. You can see a snowpack building up on the ridgeline while it continues snowing. You can tell just by looking at the scene that there’s danger of an avalanche.

You see a snowflake fall from the sky onto the snowpack.

It disturbs a few other snowflakes that lay there. Then the snow starts to spread… then it starts to slide… then it gains momentum until, finally, it comes loose and the whole mountain comes down and buries the village.

Some people refer to these snowflakes as “black swans,” because they are unexpected and come by surprise. But they’re actually not a surprise if you understand the system’s dynamics and can estimate the system scale.

Great markets work like best-selling novels — with a plot that involves an ironic twist or two. We cannot imagine a blockbuster novel in which the dramatis personae get exactly what they expect.

Nor would we want to live in such a world; it would be as dull and earnest as a poem by Maya Angelou. “The mildness and brevity of the downturn are a testament to the notable improvement in the resilience and the flexibility of the economy,” said Alan Greenspan to a congressional committee during hearings in July 2002.

“The fundamentals are in place,” he continued (as the stock market rose) “for a return to sustained healthy growth: imbalances in inventories and capital goods appear largely to have been worked off; inflation is quite low and is expected to remain so; and productivity growth has been remarkably strong, implying considerable underlying support to household and business spending as well as potential relief from cost and price pressures.”

As January 2001 began, economists must have been on the edge of their chairs. Would the Fed, which had debased the currency it was supposed to protect, now turn out to be the savior of the whole economy? Nowhere in the Federal Reserve–enabling legislation is there any mention of a “chicken in every pot.”

There is no discussion of “protecting Wall Street’s commissions,” of “bailing out underwater businesses,” of “stimulating consumers to buy,” of “helping Americans go further into debt,” nor of “reinflating leaky bubbles.” Yet, those were the things the Fed now aimed to do.