October 14, 2013

Nassim N. Taleb. If you piss against the wind and get wet, that is no "Black Swan". That is only being stupid

Sir, John Authers in “Taleb’s pared-back argument carries an unsettling truth”, October 14 refers to “The Black Swan, which explained market’s difficulties in pricing extreme events for which they had no precedent”. Those arguments, “extreme events” and “no precedent” have provided the perfect cover for failed bank regulators to hide behind.

Just knowing that all bank crises in history have been caused by excessive exposures to what has ex ante been perceived as absolutely safe, but that ex post turned out to be risky, should have made it clear to regulators that playing around with distortive capital requirements for banks, based on ex ante perceived risk… had to doom the banks to excessive exposures to something erroneously perceived as absolutely safe, all aggravated by the fact that banks then would now hold especially little capital.

Of course Taleb is right in arguing that “natural systems work by allowing things that do not work to break”, but, sincerely you do not have to be a renowned scientist or expert to know that. For instance, little unknown me, told bank regulators working on Basel II in a work shop at the World Bank in May 2003: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the other of all bank crises.”

Authers also interprets Taleb writing “Governments should have a risk manager’s mindset, and not try to prod the economy growing. Without a risk-averse mindset, risks will grow”. I am not sure that is what Taleb means, but if so, he is wrong. Currently the biggest risk is the excessive risk-averse mindset of governments and regulators which make them distort so much of the natural systems, and for instance cause our banks to be refinancing the past instead of financing the future.

“The western economy is over-centralized and that creates extra risk”. Absolutely and that is why in November 1999 I wrote in an Op Ed “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse”.

PS. I am not a regulator but once, way back, 1966, I was a sailor… though not a drunk one… at least not too much… and so I do know something of what I am talking about.

Ms Bolivia...where I learned not to piss against the wind... 1966... 16 years old.