The financial carnage -- hedge fund failures, bank runs, credit tightening, and potentially a recession -- due to the current mortgage crisis demonstrates (yet again) that very smart people can do incredibly stupid things. For all of the insight, experience, and knowledge we gained through previous financial failures, we still walked blithely into the gaping maw of the delinquencies, defaults, and outsized bailouts that characterize a financial black swan.I think this is a total misreading of the current mortgage situation. In fact, many people over the last few years have observed -- often in the same breath -- that (1) the relaxation of credit terms for the poor invariably winds up in a credit crisis, and (2) the global housing market was exhibiting every sign of a bubble. The only thing that might arguably have been a surprise is how badly people had priced the CDOs, and how illiquid the markets for these vehicles were. (Even that was pretty obvious to the folks involved in creating those products.) That's the triple play that led to this summer's financial crisis: lax credit terms for the poor, a housing bubble, and untested financialization. Anyone could have -- and a lot of people did -- predict that this mix was unlikely to have a happy ending. So, let's not call it a black swan when what we have here instead is the classic American mix of privatization of profit and socialization of costs. The charade of acting like all this was unpredictable is simply a ruse to make the bailout of bankers politically palatable.
What other future alleged Black Swans can we debunk in advance? Let me put on the record some other big, bad events that we can already see coming, and that no one ought to get away with acting shocked about when they do:
* A rapid, messy collapse in the US dollar
* A major inflationary episode in China
* A major global recession, deepened by populist anti-trade reactions
* The detonation of a nuclear device in a major global port
* All four of the above simultaneously....
When these things happen, some people will be tempted to call them Black Swans. They will base that claim narrowly, citing the particular way the event was precipitated, and the fact that certain smart were caught with their pants down, as "proof" that the event in question was "unpredictable."
But as overall categories of happening, I think these -- like the long-predicted popping of the housing bubble -- are not black swans, but more like "inevitable surprises." The particular way in which the event will come about will be unpredictable and revealing of mass complacency, but the chance that at least one of these events will take place in the next decade strikes me as better than even. In fact, the wonder with all of those events is that they haven't happened already. Of course they'll take people by surprise when they happen, but that doesn't mean they are surprising in the stricter epistemological sense that Taleb uses the term "Black Swan."
Bottom line: Just because the public or some individual is complacent, doesn't mean that the bad stuff that happens to them was a Black Swan.