The following series of short essays was written in the period June – August 2011 and posted on my website: http://leiss.ca/?p=434.
Similar pieces will be added to the series on a regular basis. If you are interested in them you may check the website periodically or follow me on Twitter (@WilliamLeiss), where I post a Tweet (a) each time a new short blog appears on my website and (b) when I read something in the current press relevant to risk issues and provide the URL for those who also might want to read it.
In 13 Bankers Johnson and Kwak make a strong case for breaking up the biggest banks as the only way out of the doom loop in the financial sector. So far, among leading bank regulators, only Mervyn King, Governor of the Bank of England, has made this case strongly; see: http://www.guardian.co.uk/business/2010/feb/25/mervyn-king-urges-bank-breakup. Today, in the New York Times, Thomas M. Hoenig, President of the U. S. Federal Reserve Bank of Kansas City, makes the case as well, in a fine short essay entitled “Too Big to Succeed”: http://www.nytimes.com/2010/12/02/opinion/02hoenig.html?hpw. Don’t miss it.
This is what we all need to keep in mind about the ongoing global financial crisis: It’s not over yet, by a long shot, and we still cannot see the bottom of the downside risk – a true black-hole risk.
William Leiss [right], with Cooper Langford and Harrie Vredenburg, at the book launch for The Doom Loop in the Financial Sector at the Haskayne School of Business, University of Calgary, 18 November 2010
In the past two years, the world has experienced how unsound economic practices can disrupt global economic and social order. Today’s volatile global financial situation highlights the importance of managing risk and the consequences of poor decision making.
The Doom Loop in the Financial Sector reveals an underlying paradox of risk management: the better we become at assessing risks, the more we feel comfortable taking them. Using the current financial crisis as a case study, renowned risk expert William Leiss engages with the new concept of “black hole risk” — risk so great that estimating the potential downsides is impossible. His risk-centred analysis of the lead-up to the crisis reveals the practices that brought it about and how it became common practice to use limited risk assessments as a justification to gamble huge sums of money on unsound economic policies.
In order to limit future catastrophes, Leiss recommends international cooperation to manage black hole risks. He believes that, failing this, humanity could be susceptible to a dangerous nexus of global disasters that would threaten human civilization as we know it.