White Swan, but Very Few People Saw It Coming

October 24, 2008 by  
Filed under Commentary, Economics

Nassim Taleb, in an outstanding Time Magazine interview, claims the current crisis is in fact a White Swan, not black.  In case you’re wondering, here’s what a Black Swan is:

“For centuries, Europeans believed that all swans were white – until black swans were discovered in Australia. A possibly minor moment in ornithology, but one that for Nassim Nicholas Taleb, a former trader turned philosopher, perfectly illustrates how poorly our past experience of the world can prepare us for sudden, unexpected, epochal events. His 2007 book, The Black Swan: The Impact of the Highly Improbable, gave rise to a new name for these moments, both positive black swans (the rise of the Internet) and negative ones (the 9/11 attacks).”

When asked what we should do now?  He answers:

“I cannot answer some questions. A lot of people are telling us what to do now. I just want to make sure it’s not the same people who were flying the plane and crashing who are going to fly the plane again. We should ban banks from risk-taking because society is going to pay the price. This is not the first time. In ’83 we paid the price. In ’91-’92 we paid the price. They keep their bonuses every time, and every time we bail them out. Now, the fact that things came back or didn’t come back is irrelevant. The fact is that we took risks and they got paid.”

More juicy tidbits:

They were gambling with other people’s money.
“That’s the point, with society’s money. Banks are gambling with society’s money, funds are gambling with investors’ money – it’s one layer better. So we should have more risks taken by funds and less risk taken by banks, because banks have a severe agency problem. … When I trade I don’t have an agency problem; I have my neck on the line. When a bank or banker trades, it’s not his neck on the line. He has an agency problem, and like [former Merrill Lynch CEO] Stanley O’Neal, if you follow the strategy you’re going to make $160 million, and keep it, even if you blow up. And you’ll do it again.”

So the big question on everybody’s mind is, what happens now?
“I try not to comment on current events directly. I think that we’ve got to progressively become a society where banks are deemed to be too precious for us, for our currency, to take too much risk. We need to have a banker who is just as responsible as someone working for the water company. Banks are going to become a utility. And banks probably will not have a lot on their balance sheet, and the risks taken will be borne by individuals like myself who have capital, and who know the risks, with their own money. Otherwise you’re going to keep having a cycle that’s deeper every time.”

Banks becoming utilities, you just gotta love that!

Photo Credit: Creative Commons License  cheesy42

Comments

Comments are closed.

Free Special Report

With interest rates near zero, how can you generate income with your nest egg? Our free special report shows you how. cover art
You will also receive our weekly market commentary and unique analysis based on our Edge Charts. Privacy

The Market Today

Subscribe to Commentary

Sign up HERE to get breaking news from Invest With An Edge & other updates.