Greenspan, the Black Swan and the Rest of Us

I had a colleague, Bruce Horwitz contact me about Greenspan’s testimony in front of Congress last Friday, described here. Bruce and I had a good conversation earlier this year about The Black Swan. The author of the book, Nassim Nicholas Taleb, has been appearing a lot on television in the past month.

Bruce thought that this was a great example of a “black swan” event, that is, when people are totally surprised by an event. At first, I disagreed. As a former banker, I have memories of the analysis that used to be done on our portfolios and I couldn’t imagine that the Federal Reserve could have missed this housing downturn. He wrote back, “that’s the point,” that Greenspan thought it was so unlikely that he dismissed it.

I went back to what Greenspan said, that the housing market had always been a local market so a national downturn was highly unlikely. He and so many others failed to see that the new financial instruments had essentially created a national, or even an international, market.

That chastened me. And it reminded me of my experience earlier this year talking to a group of accountants at Financial Executives International about intellectual capital. The talk actually went really well but I had a difficult moment at the beginning. One of my first slides was a picture of the cover The World is Flat by Thomas Friedman. I pointed out how quickly markets were becoming international and how companies were feeling increased pressure due to the growth of competition and labor forces in Asia. I asked the group whether that was something their own companies were facing and they all shook their heads, no.

The accountants, like Greenspan, were working in their traditional realm and didn’t see the pattern changing. It made me realize that as much as all of us that do agree with Friedman nod our heads in agreement that the world is indeed flat, we have only begun to understand how this fact is really going to affect our lives in the future. If Greenspan missed it, so can we all….