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Home / Opinion / Views /  Don’t let risk managers quit ‘black swan’ watch
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In the aviary of financial talk, hawks and doves are common, with owls vying for space, while black swans are roughly as rare as the rarity they convey. Every mention, therefore, gets attention. On Tuesday, in an address on the risk-reducing role of fintech in a world of finance faced with a ‘VUCA’ future—of volatility, uncertainty, complexity and ambiguity—Indian Finance Minister Nirmala Sitharaman spoke of a need to “be ready to prevent any black swan event." As widely understood, at least since Nassim Nicholas Taleb’s 2007 bestseller, The Black Swan, this refers to an occurrence that is both very unlikely and highly impactful. And since Sitharaman’s words of caution had no hint of anything specific, we can assume she broadly wanted even tail risks covered, not just the bulk under the bell curve of likelihood. What qualifies as a ‘black swan’, after all, can be subjective. If it’s foreseeable at all, sticklers insist, it isn’t one. This would let the shock of 9/11 qualify, for example, as those attacks were bolts from the blue, but not the great recession of 2008-09, as doomsayers foresaw it as a crisis sprung by a mega credit splurge, nor the covid pandemic of this decade, enabled as it was by a warmer planet helping zoonotic bugs hop over to humans. Soon after the Sars-CoV-2 outbreak in 2020, Taleb bemoaned the risk of ‘black swan’ being reduced to “a cliché for any bad thing that surprises us."

Crises with large quantums of money at stake, however, have little time for the niceties of definition, which means one can safely bet any disaster that’s flagged in advance by a few experts but is a shock anyway to most people would still attract that label. For all practical purposes, then, risk managers going on black-swan watch do have a broadly defined task to perform. They must prepare, if not brace, for the stress of what multiple-path planners call a worst-case scenario. Today’s global finance is a web of such intricacy that reliable estimates can hardly be made of what chain of events is exactly how likely. While complex links make probability scores hard to assign, a shake-up of key macro variables coupled with a noisy bunch of mixed signals could push outcomes beyond the reach of calculation, turning even firm bets into dicey gambles. Up close, this is what uncertainty is—expectations exposed to failure. At this point of a pandemic recovery (or the start of another cold war), almost every major economy checks the four boxes of ‘VUCA’, ours included. If America’s central bank has taken over as generator-in-chief of global anxiety, the reason is not a black swan taking shape on a fuzzy 2023 horizon, but the distinct if moderate odds of a worse recession ahead than the Fed’s chant of a ‘soft landing’ might have lulled many of us to expect.

With an inflation flare-up in the US, the Fed may have no option but to squeeze credit so hard that commerce sputters and businesses choke just for it to claim a regain of control, vital in an era of challenges both overt and crypto. Given how the Fed gave in to a market ‘taper tantrum’ in 2013, whether it has the nerve to stare down resistance to its rate hikes is yet to be tested, but the fallout of its failure may be huge because its covid rescue was so big. While a policy-amplified surge in credit flows did act as an economic stimulus, it also enlarged debt burdens, inflated asset values and pushed risk-bearing above danger levels. As Fed policy reverses, much could now come apart. If it happens, we can’t feign ignorance.

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