How to build a self-healing bank

BANKS should be more like cats than washing machines. So suggests Nassim Taleb, ex-trader and controversial author of The Black Swan, who has a new book out in time for Christmas. What he means is that living things – cats, economists, bankers – display a property that even our best-designed machinery lacks: a quality that he names antifragility, fragility’s true opposite.

To be antifragile, it is not enough to be robust and able to resist a few knocks. Something antifragile is actually better under pressure: self-healing, it treats damage as a source of data, from which it learns and adapts, ending up stronger than before. Perhaps that’s why cats are said to have nine lives.

In this light, our response to the financial crisis has been calamitous. Rather than building a banking sector where regular failure can make total disaster less likely, bailouts have driven problems out of sight. Inflexible capital rules, focusing on a single vision of robustness, crowd out diverse solutions that between them could survive any possible change.

Worse still, the economy appears to suffer from a quality that we could call antirobustness. It can become stronger when subjected to regular stress – like Taleb, who has lifted enough weights to boast that he looks like his own bodyguard. But when stresses are removed, it actively becomes weaker. Seen in this light, the so-called Great Moderation in business cycle volatility, or Alan Greenspan’s decision to keep interest rates low in the early 2000s with loose monetary policy, were reasons to be fearful, not cheerful. Cosseted economies will totter when the time finally comes for them to stand on their own two feet. What this implies for the UK’s current ultra-low interest rates does not bear thinking about.

Taleb’s book seems to acknowledge that his approach is unlikely to catch on soon: it is more a handbook for life than a policy proposal. Perhaps that is just as well. He has been called David Cameron’s guru, which puts him in inauspicious company, lumped with the vague trendiness of Lord Layard’s economics of wellbeing, the top-down meddling of Richard Thaler’s nudge theory, and the prescriptive theorising of David Brooks’ Social Animal. At times – as when Taleb fantasises about beheading bankers in front of their own banks – he can seem just as reactionary and crowd-pleasing as the rest.

Yet unlike Cameron, Taleb is an independent thinker, unafraid to live away from the intellectual herd. A follower of the paleo diet, which draws on pre-agricultural eating habits, he is (if not always original) refreshing in his willingness to turn to ancient sources in search of wisdom. Instead of recycling the usual technocratic cliches, Taleb supports his case by quoting the Roman trader-philosopher Seneca. Challenging us to rethink our assumptions, his philosophical provocation is a valuable companion as we approach the New Year.

Antifragility by Nassim Taleb is published by Allen Lane.

First published: City A.M., 7/12/12

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