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Black Swan’s Taleb Says Reduced Volatility Adds Risks: Tom Keene

Reduced financial-market volatility may make the global banking system more fragile, according to New York University’s Nassim Nicholas Taleb, author of the book “The Black Swan.”

“We have a fear of volatility,” Taleb, who this year published “Antifragile: Things That Gain From Disorder,” said today in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene. “If you spend a lot of time lying in bed, you’d have a very smooth life, but the minute you come out of it, you’re going to break a limb.”

JPMorgan Chase & Co.’s G7 Volatility Index of major currencies declined on Nov. 13 to its lowest level since 2007. The benchmark climbed to a record level in October 2008 after Lehman Brothers Holdings Inc. collapsed.

Alan Greenspan, chairman of the U.S. Federal Reserve from 1987 to 2006, cut the target rate for overnight lending between banks to a then-record 1 percent in June 2003, and held the benchmark at that level until June 2004. Greenspan said Aug. 9 in an interview with Bloomberg that since the financial crisis, he has been criticized for keeping interest rates too low in 2003 and for failing to appropriately regulate subprime mortgage standards. Congress passed the Dodd-Frank law to increase regulation of the banking system following the financial turmoil.

System Analysis

“We have fragilized systems, just as Greenspan fragilized them by smoothing out the economic cycle, we have fragilized by injecting artificial, what I call, suppression of variation and variability in an organic system,” Taleb said.

The European Central Bank cut its benchmark interest rate to 0.75 percent in July and the Fed’s target rate has been at virtually zero since December 2008. The ECB also said on Sept. 6 it would spend as much money as needed to restore confidence in bond markets, while the Fed has pledged to continue stimulus efforts until the economy improves.

“Every incident should save lives, and it does in engineering,” Taleb said. “A bad environment is one in which mistakes are very costly and don’t lead to any improvement, and that’s what we’ve had over the past decade with the banking crisis.”

The term “black swan” was popularized Taleb’s 2007 book with the same title. It’s a metaphor for an unforeseen catastrophe and derives from the once widespread belief in the West that all swans were white, until European explorers discovered black swans in Australia.

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