Nassim Nicholas Taleb, the #1 NYT Best Selling author of Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and The Black Swan: The Impact of the Highly Improbable, predicted the current banking crisis 12 years ago.
As a trader for 18 years, and an intelligent critical thinker his entire life, Mr. Taleb knows of that which he speaks. If the current and latest crisis has caught you by surprise I highly recommend reading both of his books to prevent you from being blind-sighted again.
So why didn’t anyone listen to him? It won’t be a shock to consider selfish greed on the part of those in a position to do something about it as the main cause. We all know now that trillions of dollars in profit were made by the people with an investment in propping up the house of cards.
Greed leads to neglect and collapse…again. To gain an understanding beyond the obvious fact that a deregulated industry of sharks couldn’t be trusted to do the right thing, lets look at three quotes from The Black Swan which was written between 2003-2007.
Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.
Banks hire dull people and train them to be even more dull. If they look conservative, it’s only because their loans go bust on rare, very rare occasions. But (…)bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.
The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events “unlikely”.
Hindsight is always 20/20. Foresight takes a little effort to develop. By recognizing that Mr. Taleb, and surely some others in the banking and finance industries, did see this train wreck coming down the tracks we can pay more attention to future signs of obvious insanity.
Our biggest major surprise was that invading and occupying Iraq was a bad idea. Honestly, it didn’t take a foreign policy expert to see that. Sunni and Shiite factions had been covertly and overtly warring with each other for centuries and no one treats invaders and occupiers as liberators.
Then there was Hurricane Katrina. Not really a surprise after weather forecasters warned of it’s possibilities years before it happened, but it never the less shocked the nation. A hurricane in Kansas would be a surprise. A little critical thinking can go a long way to waking up from the cartoon media trance most of America lives in today.
There will be other crises down the road in many industries. Some can be predicted and some cannot. Priests and other crusaders of morality will be caught doing the things they condemn, politicians will lie to get what they want, lobbyists will choose personal profit over public interests, and on and on. Stopped being shocked when these things happen for the hundredth time.
By expecting the unexpected to randomly happen and questioning every time you hear the words, “No one could have predicted this” like it was a fire alarm, you’ll enjoy more peace and sanity. Or at least you won’t be a blind sheep believing everything the “experts” tell you.
