Wednesday, October 01, 2008

Taleb tries not to say "I told you so"

In the dead slot of the BBC Radio 4's Today programme, after 8.45 when everyone is arriving at work, there are often interesting debates about the issues of the day.

Today Nassim Nicholas Taleb was one of the guests and, as he has done before, he spoke out about the systemic risks that bankers did not realise that they were undertaking.

He also made the point that in the 1982 Emerging markets crash the Bankers lost all the money that they ever made, and then they did it again in the 1991 Savings and Loans crash. In other words, most of the banking system has not, in the long term, been a profitable business. He added that with each successive crash, risk has become concentrated in a smaller and smaller number of banks. As a result the problems have grown larger.

The answer is clear- if not simple- the ecology of the global banking system needs to change and become more diversified. Single risk should not be concentrated in the system. Diversity is critical in order to reduce the concentration of risk.

The problem is that the regulators are now simply trying to cope with the crisis that is happening now- they are not focusing on creating a more diversified ecology of banks- indeed, far from it. The primary result of the crisis in the UK has been the concentration of ownership of bank assets into only six super-banks. This, of course presupposes that size alone is the biggest guarantee against failure, whereas the loss of Lehman, Merill, etc. shows that this is certainly not the case.

The fact is, that in trying to address the problems of today, the state is now creating a regulatory environment which is likely to concentrate systemic risk still further. In the way the state is dealing with the crisis of 20o8, they are creating the conditions for a still bigger crisis in 2018 or so. This can not be said to be even a Talebian "Black Swan"- it is actually quite easy to forecast.

Listen again to Taleb's words of wisdom (and Evan Davis' continuing mispronunciation of his name) on the Today website at 08.45 on the running order.

1 comment:

Newmania said...

Interesting to see the European banks in an even worse state than the US . I am not at all convinced our system is secure C.It is rumoured that a household name insurer is about to go. This has a very long way to go