Tuli Can't Stop Talking

These are just my thoughts on contemporary issues and an attempt to open up a dialogue.

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Location: New York City

A citizen who cares deeply about the United States Constitution and the Rule of Law.

Wednesday, April 01, 2009

No “Black Swan” Here!

Everyone talks about how this current economic meltdown is a “Black Swan,” well Ian Welsh isn’t buying it. And I must say as one who has been following Roubini, Krugman, Baker, etc. for years I am not buying it either. Taleb’s “Black Swan” theory could apply to the stupid and greedy architects of the problem but not those who were actually paying attention. They predicted it and outlined what was happening.

I have become increasingly concerned that some in the Obama administration are treating this economic crisis as a Black Swan event. Nassim Nicholas Taleb coined the term to describe an event that is very rare, random and unpredictable. The imporant thing about Black Swans is that, because they are random and unpredictable, you can’t stop them from happening; you can only create your systems able to handle Black Swans if they occur. For example, a flu pandemic that kills tens of millions might be a Black Swan, and it’s one that we’re completely unprepared for, as we don’t have the excess medical capacity to handle it.

The most recent event which made me think of Black Swans is the news thatnew SEC Chair Mary Schapiro doesn’t plan on reforming ratings agencies. Now, ratings agencies were one of the key actors in this mess—they certified mortgage backed securities and other toxic derivatives as AAA quality. If they had not done so, almost no one would have bought them.

The ratings agencies are paid by the companies whose securities they rate. I trust you see the problem.

If you think that the current economic crisis is just random, a once in a century disaster (or at least once every few decades), then you won’t think making major changes is necessary. Get through the problem, go back to how you were doing things before, and everything will be fine.

But, of course, the economic and financial crisis unfolding right now was not random. This crisis was predicted by multiple people, and it was predicted because of policy steps taken by government and widely-known private actions.

Read the rest and reset and reboot your thinking.


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