We should have seen
this crisis coming
James Montier dismisses the view that the
uncertainty surrounds the details of the
current fi nancial crisis was a ‘black swan’,
impending disaster, there is little
uncertainty that a large disaster awaits”.
a highly improbable event impossible to
Th e New York Times ran an article in mid
forecast, but rather he believes it was a
December 2007 saying that, seven years
earlier, Edward Gramlich, a Federal Reserve
‘predictable surprise’
governor, had warned that a fast-growing
breed of lenders was luring households into
BY: JAMES MONTIER
risky mortgages that they couldn’t aff ord.
Th e article also cited the eff orts of Sheila
Bair, a senior Treasury offi cial, to persuade
t is sometimes said that the current issues in the US economy, sub-prime lenders to adopt a code of
I
housing market, credit markets, commodity market and equity practice, and to let outside monitors verify
market are a black swan, which my friend Nassim Taleb defi nes as a compliance.
highly improbable event with three principal characteristics: it is
unpredictable, it has a massive impact and, after the event, explanations IRRATIONAL EXUBERANCE
are concocted that make the event appear less random than it was. Robert Shiller even went so far as to re-issue
Nothing could be further from the truth than to characterise the his book, Irrational Exuberance, with a
current situation as a black swan and to claim it is nothing more than an chapter dedicated to the housing market.
attempt to abdicate responsibility. Even I wrote a note on the housing market
However, these events are ‘predictable surprises’, a phrase coined by in June 2005 which concluded: “All the
Michael Watkins and Max Bazerman, which also have three criteria of a speculative mania seem present
characteristics: at least some people are aware of the problem; the problem to me.”
gets worse over time; and eventually the problem explodes into a crisis. As So the big question is: what prevents us
Bazerman said: “Th e nature of predictable surprises [is that] while from reacting to predictable surprises?
16 WINTER 2008/09
blackblack swan.indd 16swan.indd 16 27/11/0827/11/08 15:51:2615:51:26
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