Monday, April 22, 2013

Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb

Nassim Nicholas Taleb is back, and in his new book he asserts that his signature idea was not The Black Swan (that was so last book), but rather Antifragility. This second idea shares a viral quality with the first; like the Black Swan, once you catch the notion of antifragility, it's hard to get rid of it.

Antifragility is the characteristic of certain systems to grow stronger when stressed; it is the mirror concept to fragility (where stress destroys). Exercise stresses our muscles, and so renders us stronger. As Taleb insists, antifragility is not robustness -- robustness is merely resistance to stress. Stress improves the antifragile. And in a world where stresses cannot be avoided, it is better to be antifragile.

Thursday, April 11, 2013

The Bankers' New Clothes: What's Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig

I have the odd habit, with academic writing, of first reading the notes and then returning to the central text. I like to see the foundation of a work. Would that I had read the notes to The Bankers' New Clothes first! For The Bankers' New Clothes is really two books which I had read in sequence (slave as I was to the Kindle's primitive formatting). The first book -- the primary text of 228 pages -- seemed simple-minded, sometimes shrill and often tedious. It argues for a significant increase in the amount of 'capital' (a specialized term in banking regulation) banks should maintain. The second book - the 107 pages of dense notes -- reveals a much more subtle, more flexible and more open understanding of the issues. This 'book' is more useful and persuasive. I recently heard co-author Anat Admati speak in Los Angeles. She described her surprise when first viewing the book as published, that it was so 'short' when the notes were stripped away and shuttled to the back of the book. It matters (Kindle take note) how books are presented; I would have had a better impression on my first read had these rich notes been on the page or gathered at the end of each chapter. And perhaps these authors will speak up the next time they write for the broader public.

Admati and Hellwig are on a mission. They fervently believe that banks should be required to hold more capital than present rules require. And by more, they mean much much more. From current rules that require, depending of the measure, 3 to 7 percent of a bank's assets, to something on the order of 20 to 30 percent. They demonstrate that such higher levels of capital (think of this like the ratio of equity to the fair market value of a house) would significantly increase the robustness of the entire banking system, relieving the state from facing new rounds of bailouts. Moreover, as the leverage of bank's decrease, banks will be less likely to attract the risk-seeking buccaneers that have managed our great financial institutions into the ground.