‘Black Swan’ Volcano Offers Three Simple Lessons: Matthew Lynn

Commentary by Matthew Lynn
April 21 (Bloomberg) -- For a generation or more, no one ever gave a second thought to Iceland. Now it has shaken up the world twice in a couple of years.
First its banks collapsed in the most dramatic illustration of the fragility of our financial system. Now an Icelandic volcano is spewing ash into the sky, prompting a shutdown of European airspace. The continent is paralyzed. Planes are grounded. Travelers are stuck thousands of miles from their families and workplaces. Business is grinding to a halt.
Both happenings are strangely similar. They are, to borrow a phrase from financial theory, "black swan" events:
unexpected developments, coming out of nowhere, for which no one has any kind of contingency plan. And they are a warning about the fragility of the modern economy.
The lesson, surely, is to be aware of how easily whole industries can be blown apart. And to make sure we build systems robust enough to survive the worst that can be thrown at them.
If the flight ban can teach us that, we should welcome it -- even though thousands are stranded far from home.
The Eyjafjallajökull volcano has caused chaos on a massive scale. Since the April 14 eruption, more than 80,000 flights have been canceled. An easing of the cloud of ash, which can cause lethal damage to aircraft engines, meant that some European airports were starting to reopen yesterday. But London’s Heathrow remained shut. And no one really knows how long the volcano will be a threat to the skies. Its last major eruption in 1821 lasted more than a year.

Air Dependence

It can teach us useful lessons, if we want to learn them.
First, we are dependent on air travel. Our economy is kept in motion by fleets of jetliners and a network of airports.
Business revolves around meetings in hotels next to the runways.
Documents are ferried around by air. Even the food in grocery stores often lands a day before from another continent.
But air networks are very delicate. They are constantly at the mercy of the weather, mechanical failure, labor strikes and terrorist plots. We should have learned after the Sept. 11 attacks on New York and Washington not to depend so much on flying. Likewise, we should listen more to the climate-change scientists warning about the impact of global warming. Perhaps the chaos of the last few days will teach us that our economy needs to be more grounded, both metaphorically and literally.

Distance Counts

Second, we forget that distance counts. Globalization has made the world seem a very small place. E-mails ping from continent to continent in the blink of an eye. Social networks allow us to be friends with people thousands of miles away as easily as if they lived in the next street. Money flashes from country to country, and ideas and trends zip around the world.
And yet, when the technology breaks down, it is a long way from Helsinki to Madrid, or from New York to Berlin. Try doing that journey the old-fashioned way -- by car, by boat, or on foot -- and you suddenly realize the distance between places still counts for a lot. The world isn’t as much of a global village as we think it is. It’s still a vast place, and the local can often bite back at the global.
Third, we need to prepare for the unexpected. A couple of years ago, it was the financial system that fell to pieces.
Right now, it is the transport system. In both cases, the cause was something we didn’t expect, or make any plans for. We thought hedge funds might blow up the banks -- instead some rather dull-looking mortgages did. We thought terrorists might spread chaos through the airline system -- it turned out that ash from an Icelandic volcano did that job.

‘Black Swans’

In reality, "black swans" are everywhere. Much of Europe’s energy is now supplied by Russia. Is that really stable in the long term? Much of our food is now genetically modified.
What would happen if we suddenly discovered it wasn’t safe anymore? The euro is a relatively new currency. It has struggled to cope with a few deficit issues in Greece, one of the smallest member states. There must be half a dozen different kinds of crises that could mean the money most of the continent relies on doesn’t work anymore.
All sorts of unexpected events are lurking in the shadows.
By definition, we haven’t thought about them. It is because they are so unexpected that they are so dangerous. What we can do is think harder about the threats, get better at forecasting them, and find ways of making ourselves less vulnerable.
Air travel is useful. It is the quickest and usually the cheapest way of getting around. But we shouldn’t depend on it as much as we do. We shouldn’t rely so completely on any single network, whether it is financial or technological. That should be obvious to everyone. But sometimes it takes something as powerful as a volcanic eruption to make a simple point.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

It is nearly impossible to forecast a Black Swan. That correct forecast would be a Black Swan in of itself. Taleb speaks candidly of this in his book. However, it is smart to think of potential Black Swans and not accept the information presented to us on computer screens. Black Swans are random and irrational, not predictable.