Thursday, 9 October 2008

Interlocking Fragility

The October 1st edition of Edge includes the following quote from Nassim Taleb's book The Black Swan.  Relevant, given what's happening right now:

From Edge 259 (about 3/4 of the way down the page):

"Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought."

— Nassim Taleb, The Black Swan (2006)

Disclaimer: I haven't read this book yet. Some comments I've heard or read suggest that it's superficial, rambling pseudo-science, more a collection of entertaining but relatively facile observations (perhaps including the above) than an exposition of something profound. 

Still, this one seems to have come true.

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