We’ve been big fans of the author and academic, Nasim Nicholas Taleb, for some time. We have enjoyed his best-selling book, ‘The Black Swan’, his media appearances and have used his work to find other interesting works by the likes of Benoit Mandelbrot. A central theme in Taleb’s writing is that systems should be built not just to withstand 99% of scenarios, but all scenarios. A bit like saying we should build a house that stands for 365 days a year, not one that stands for 364 days only to be toppled by the perfect storm.
Taleb draws lessons from Mother Nature, who takes a long term outlook and offers systems built to last. Mother Nature builds ‘redundancy’ into her designs; we have two kidneys and two lungs to counter organ failure. No species would survive if it out competed all others for 364 days of the year, only to be wiped out by a single freak weather event. Mother Nature’s designs are described by Taleb as evolving and strengthening as they weather and react to crises and experiences. With Taleb’s latest book, ‘Anti-Fragile’, coming out this autumn to a backdrop of a withering European banking system and a debt afflicted global economy, he launches his latest release to a fertile market and with his ideas in demand.
Mother Nature and banking
Compare the long term thinking of Mother Nature, with her insistence on longevity and durability, to today’s highly leveraged banking system where even ‘steady’ commercial banks (Spanish Cajas anyone?) are often leveraged 20 times. We read of slow bank runs taking place in Spain and Italy, whilst they might not be quite so slow at the moment in Greece.
In case any reader is new to this (no shame in that), we currently have a fractional reserve banking system. In such a system a bank is able to take £5,000 of deposits and lend it out 20 odd times, or more. Assets in said bank of £100,000 are backed by only £5,000 of collateral.
During periods of calm and steady growth such a system goes unquestioned, but its volatility and vulnerability are shown in unflattering light in times of crisis. We are experiencing such a time now.
An overly leveraged reserve banking system is highly vulnerable to bank runs, where depositors panic and…
