Sandy's Key Lesson Applies to More Than Bad Weather

The NY Times is out with a story today chronicling all the warnings about Gotham's vulnerability to storms and flooding.

Loss of life and economic devastation are made all the more tragic when we realize that these losses were at least in part preventable.

But as an anonymous source close the New York government officials put it:

"until things happen, people aren’t willing to pay for it".

Indeed.

As Nassim Taleb, et al have written about, there are deep psychological and evolutionary roots to our species' tendency to ignore seemingly low probability, catastrophic events until it is too late.

Explain this 'insurance' thing to me one more time?

Perhaps as the human species was evolving and facing a daily battle for survival there was a prohibitive cost to planning too far into the future. Now, however, with the hunting/foraging days long gone for most of us, we're still stuck traveling through life with the same 'Cave Man software' of our forefathers.

With Mother Nature having reminded us what she's capable of there will likely be some changes to storm protection systems along the East Coast. But unfortunately I'm not terribly optimistic that we can extrapolate the lessons of Sandy to other systemic risks, such as asteroid collision, climate change, and number one focus of this blog, financial crises.

Sadly, the Cave Man is still in charge of this joint.

Video: Nassim Taleb On Occupy Wall Street

Video after the jump:

Book Review: The Bed Of Procrustes By Nassim Nicholas Taleb

'Most people write so they can remember things, I write to forget' - The Bed of Procrustes: Philosophical and Practical Aphorisms

Nassim Taleb's latest book is a collection of miscellaneous memorable thoughts (aphorisms), many of which relate to Taleb's disagreement and frustration with the academic economics practiced and publicly promoted by many Nobel prize winning economists.

There are two aspects of the title which warrant further discussion.

First, the term 'aphorism' comes from the classical Greek writings of Hippocrates. Given the various ills in economics which Taleb would like to see fixed, the appeal of referencing the father of medicine is quite clear.

The second aspect of the title, the 'Procrustean Bed', is also borrowed from classical Greece. The mythological figure of Procrustes would cut or stretch people to make them fit into his iron bed. Taleb's view is that many leading economists basically do the economic equivalent by framing the world in a way so that it fits into their quantitative models, rather than the other way around.

Continue reading the full review at SeekingAlpha here.

Mervyn is the Man

Anyone following the ongoing financial crisis (yes, it's not over yet) closely these past few years has probably noted the markedly different rhetoric coming from two central banks on opposites sides of the Atlantic.

BoE Governor Mervyn King

Governor Mervyn King is Ben Bernanke's equivalent at the Bank of England. This weekend he again excoriated Too Big to Fail banks, which predictably led to HSBC threatening to leave town (again).

Is Mervyn out of his mind? I mean, however will London's economy and the U.K.'s tax receipts survive if megabanks like HSBC relocate to Singapore?

The oft-repeated threat by Too 'Bigger' to Fail megabanks that they'll leave town for lax regulatory and lower tax enclaves in Switzerland, Asia, etc. shouldn't scare anyone. If in fact they do carry through on this threat I for one would be at the airport to wave them off goodbye.

For starters, many megabanks don't pay much in the way of local taxes. But that's not the main reason we should call the Too Bigger to Fail bankers' bluff.

With respect to megabanks' threatening to leave town, author Michael Lewis recently made the following analogy:

Your local utility is found to be poisoning the community's water supply, which is making people sick. However, in order to continue providing electricity the utility says that it has to be allowed to poison the water. If the community doesn't allow it to keep poisoning the water then it will leave town for another location which is ok with this. 

The obvious response to this lunacy is to tell the utility to take a hike -- our community can find someone else to provide non-polluting electricity!

Banks are like utilities. They both fulfill important functions. However, Too Big to Fail megabanks are not the only firms capable of providing banking services. If Too Big to Fail firms leave town then other smaller banks, which don't poison the local water, would gladly step into their place. There is nothing so special that Too Big to Fail banks do that can't be easily and quickly replaced. In fact, they are much, much easier to replace than an electricity utility.

Megabanks pose a risk to the health of the economy, just like the water-poisoning utility poses a risk to the well being of the community. When something goes wrong at the Too Big to Fail banks, like it did in 2007-2008, everyone suffers in the form of bigger deficits, higher taxes and lost jobs.

Meanwhile, it looks to be another record setting year for banker bonuses.

Between Governor King and the Independent Banking Commission's Sir John Vickers it would appear that the U.K., unlike the U.S., has the right people in the right place at the right time.

Bravo, Mervyn! Keep up the good fight!

P.S. Interestingly, Mervyn in his pre-BoE life was Michael Lewis' tutor at the London School of Economics.

Video: Nassim Taleb Interviewed on Charlie Rose

The author and professor was on Charlie Rose this week talking about debt, financial fragility, the Fed and Bernanke, why Europe is more robust than the U.S., and other topics.

Link to interview here.