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Archive for May 1st, 2012

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.  The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.  But not to worry: their large staff of scientists deem these events “unlikely”.
 

—  Nassim Nicholas Taleb
from his book: “The Black Swan” written in 2007
 

 

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