Perceptive Information Strategies

This week I have been attending the annual IBM Cognos Industry Analyst Summit in Ottawa, Ontario Canada. Although I’m in meetings most of the time, I enjoy coming to Ottawa. The green colors, blue canals, rivers and lakes and crisp hints of fall in the air offer a nice change from the dry brown of California in September. On this trip, however, I couldn’t help but be thrown back to a year ago, when headlines from across the border screamed panic on Wall Street, in Washington and in the financial services industry. Like many, I stood mouth agape every morning as I read and watched the news. It looked like The Big One: the economic cataclysm we hoped we’d never see in our lifetimes. In sheer size, reach and complexity, it had every chance of dwarfing the Great Depression.

One year later, are we out of the woods? Did the brave if not desperate moves of Paulson, Geithner and Bernancke stave off disaster? Not according to Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable (Random House, 2007). I caught an interview with him by Margaret Wente in this past Monday’s in The Globe and Mail. Here’s a snippet:

Margaret Wente: Happy days are here again. The central bankers say the recession is over. The markets are buoyant. Can we relax?

Nassim Taleb: Not at all. Central bankers have no clue. In the first place, the financial crisis was not a black swan. It was perfectly predictable. They ignored the phenomenal buildup in leverage since 1980. They acted like airline pilots who’d never heard of hurricanes.

After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.

Taleb carries no water for the wizards currently trying to sort out this mess:

MW: Are you saying the U.S. shouldn’t have done all those bailouts? What was the alternative?

NT: Blood , sweat and tears. A lot of the growth of the past few years was fake growth from debt. So swallow the losses, be dignified and move on. Suck it up. I gather you’re not too impressed with the folks in Washington who are handling this crisis.

Ben Bernanke saved nothing! He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumour and says the patient is doing very well. The first thing I would tell Chinese officials is, how can you buy U.S. bonds as long as Larry Summers is there? He’s a textbook case of overconfidence. Look what happened to Harvard’s finances. They took a lot of risk they didn’t understand, and it was a disaster. That’s the Larry Summers mentality.

And, he is gloomy as a gathering winter storm about the future:

MW: So if everyone is still on the wrong track, what’s the right track?

NT: My whole idea is to lower risk in society by developing a system that can resist human error, rather than one where human error rules. The first step is to make sure that no financial institution is too big to fail. Next, make sure governments don’t favour big companies. Governments should also decrease the role of economists – they’re no more reliable than astrologers, and they do more damage.

Feeling myself to be but a tiny rowboat on a roiling ocean, I am too vulnerable to give in to the pessimism of Taleb. The human in me has to believe that as we live through this debacle, we will learn how to use the tools at our disposal to climb to safety and adapt to the new reality. However, I share his concern that the problems have not gone away. They have only shifted and changed – and have become joined at the hip with the US government’s inability to control deficit spending.

Taleb would probably find the Marsh advertisement I saw on a placard at Chicago O’Hare International Airport both ironic and alarming. Written across a fine-grained, Avedon-style close-up of a human face was the proclamation, “I Risk, Therefore I am.”

I will be blogging about what I learned at the Summit at Intelligent Enterprise and Ventana Research. But, since my battery is about to go, I’ll have to get those done when I’m back on land and can charge up.