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. Not the first time I’ve written to FT on this: Here and Here

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 during four months I learned not to piss against the wind... 1966... 16 years old.

John Kay, but then what are those who endorse or cover up for the fools and hedgehogs who claim to know the future?

Sir, John Kay writes “Only fools and hedgehogs claim to know the future of complexity” January 2. And I must ask: Do you know some who, with their capital requirements based on perceived risk, have claimed to know the future of complexity more than the bank regulators and their clairvoyants the credit rating agencies? I do not! 

These fools not only believed they could control the future without distorting it but they also entirely forgot that the risk in banking has absolutely nothing to do with the risk-perceptions being correct, and all to do with these being incorrect. If the regulators had only taken note of the empirical realities of all bank crises, they would have set the capital requirements for banks higher for what was perceived as “absolutely not risky” than for what was perceived as “risky”. 

But what does then all that make of all those who without protesting allow these fools and hedgehogs to keep on regulating the banks using the same faulty paradigms? Since FT has not wanted to echo my arguments about the distortions produced by bank regulations, FT is actually one of those endorsing or covering up for the fools and hedgehogs in the Basel Committee and the Financial Stability Board. 

That a “Black Swan” is to be blamed for the disaster? Forget it! This was all an entirely predictable and manmade disaster.

Do not allow regulators to hide behind “unintended consequences”.

Sir, where do you draw the line between unintended consequences and sheer stupidity? That is the question we should make after reading an article such as “The tough challenges to revive the global economy” written by George Osborne and Jun Azumi, the finance ministers of Britain and Japan, February 23.

Privileging bank lending to what is officially perceived as not risky, by means of extraordinarily low capital requirements, just had to create excessive and dangerous bank exposures to triple-A rated securities and infallible sovereigns. That I repeated over and over again, even while being an Executive Director of the World Bank 2002 -2004. So that should not be allowed to fall into the category of unintended consequences. 

It behooves us to hold regulators very accountable for how they regulate, most especially if they regulate on a global scale. In this respect we must see to that those regulators are not allowed to hide behind “unintended consequences”… or Black Swans for that matter.

Don´t point fingers at the economists

Sir, I refer to Robert Skidelky´s “How to rebuild a shamed subject” August 6. There should not be any finger pointing of the economists specifically. Many are to blame, including the financial press. 

This crisis has nothing to do with economics and all with the lack of ordinary good common sense. Given the strong incentives of the minimum capital requirements for banks concocted by the Basel Committee for to follow the opinions of some few credit rating agencies, everyone should have known that, sooner or later, something was doomed to go wrong.

I, as an Executive Director at the World Bank (2002-2004) said so over and over again; and FT even published a letter where I, in January 2003 said that “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.” 

Now why could we not react and stop what was being done? Because the whole regulatory debate was captured by some regulatory gnomes in Basel, who let no outsider question anything in their cozy little mutual admiration club. 

By the way, in the context of this crisis, please stop talking about a black swan or, at least, as a bare minimum, clarify that it was a black swan fabricated by the regulators.

What we have is a genetically modified Black Swan

Sir if you throw a coin, betting on head or tail, and then suddenly it lands on its side then that is a real and natural Black Swan event. But, if you alter the coin in such a way that it must land on its side, more sooner than later, then when that happens can no longer be referred to as a real and natural Black Swan since it is a manmade event. At best we could perhaps refer to it as a genetically modified Black Swan.

The current financial crisis would not have happened had the regulators not empowered some few credit rating agencies as their official risk surveyors and these had not with their AAA signs guided the risk adverse herds of capital in an absolutely wrong direction.

In this respect it is truly surprising that Nassim Nicholas Taleb, a scholar on Black Swans, does not include among his “Ten principles for a Black Swan-proof world”, April 8, the importance of not forcing or stimulating the world to follow the opinions of just a few.

Erroneous credit ratings were the ignored Black-Swans.

Sir in your “A straitened future for troubled banks” December 30 you rightly lay forward the many of the difficulties in deleveraging. But your analysis would have been more complete if you had acknowledged the fundamental role that financial regulators played in the leveraging process. The Basel Committee set up a system based on the presumption that risks could be measured accurately, always, and allowed some very highly leveraged balance sheets when the risks, among other as measured by the credit agencies, were deemed to be low risks.

The risk that was never accounted for, in other words the real Black-Swan event, was the risk that the credit rating agencies would be mistaken, a risk the regulators should never have ignored.