Posted by: Nicholas Davis | March 6, 2009

Robustification of the global financial system

One of the key ideas from Davos this year was need for a practical set of tools, approaches and structures that would increase the robustness of the global financial system. In the grand tradition of verb-izing adjectives, this has recently described as “to robustify”, then noun naturally being “robustification”, words which are growing on me purely because they are used with such messianic zeal by Nassim Taleb.

There’s no doubt that this moment in time is an amazingly opportune moment to discuss major shifts in how the world views risk, complexity, uncertainty, human error and the management of the same (this blog is no accident, in other words!). But in recent conversations with people such as Nassim and other great thinkers about how you actually go about this, a few interesting but not uncontentious ideas have emerged.

1) There is no point engaging with classical economists in discussions of a new approach to these issues – they are almost impossible to convince, and even if we succeeded it wouldn’t have much effect. Instead, we should focus on convincing policymakers, CEOs and the heads of business schools (thanks Nassim!)

2)  In terms of a global audience of policymakers, the G7 is dead, long live the G… huh? The exact number of the new grouping that will survive the London talks in April is yet to be determined, and there are some very interesting conversations being had about what this might be. While the number and criteria for determining it are both unclear (where are you, Spain?), what IS clear is that we need a broader grouping that includes more sources and consumers of capital, as well as a better geographically representative set of members. Aussie, aussie, aussie!

3) While it’s all very well to expend energy thinking about transcendent models, meanwhile banking systems are still completely stuffed, with many banks technically insolvent. Here, the US should be leading the way, but again Gordon Brown seems to claiming to be the beacon in the darkness (despite ducking many core questions in interviews of late). The US administration seems in a serious bind – with the mood on the hill increasingly hostile, it can’t go back to congress to ask for more money for bail outs. On the other hand, going for nationalization would imply paying out existing bondholders some portion of what they’re owed, which would mean (I believe) taxpayer’s money being paid out against downgraded bank assets in any event. So, given the evils of the N-word, it seems they are stuck with ill-advised, underfunded bail-outs and prayer (in that order).

4) The key connection that has to be made in order to strengthen financial systems is between the two issues of complexity and that of bias or human error. Great work has been done in both fields, but the connections between the two (playing interconnectedness in harmony with human-induced inefficiencies) is an under-explored area, and one that I dearly would like to explore.

I will write more about this robustification as the ideas progress. Any suggestions?

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