"The Peculiar Predominance of Luck"

 The implosion of Silicon Valley Bank—the second largest bank failure in U.S. history, as all the headlines have blared the last few days—is one of those astonishing events (a bank run? An old-fashioned financial panic? In 2023?) that already has acquired an aura of retrospective inevitability. After all, we knew that something was going to go haywire in the financial system this year. We just didn't know exactly what, or exactly when. All last year, we were dreading what seemed like an unavoidable recession. It kept being foretold; and yet it never actually came. All this calendar year so far, we have similarly been living under the Damoclean peril of the House GOP's refusal to raise the debt ceiling—we just don't know exactly when we will crash up against it. 

Some sort of looming financial catastrophe was plainly in the air, therefore, following the come-down from the pandemic-era bull market and the Fed's program of interest rate hikes. We just didn't know what it would be. Thus, we are truly experiencing a "black swan" event (named for a book by Nassim Taleb that I confess I have not yet read). The idea of the black swan—as I understand it—is that any given improbable thing may be unlikely in itself (by definition—so far we have merely a tautology). But given enough time and a large enough set of discrete events, improbable things will nevertheless happen. Thus, improbable events do in fact need to be factored into our expectations for the future. We need to be prepared for the seemingly unlikely catastrophe—such as a classic-style bank run occurring in 2023. 

The SBV collapse is a particularly fine illustration of the black swan principle because it is exactly the sort of likely unlikely event the theory has in mind. No one could have predicted that it would be precisely this bank that would fall victim to an irrational panic. To be sure, the bank announced moderate and perfectly explicable (and temporary) losses due to having to sell long-term Treasury assets at a loss that had declined in value thanks to higher interest rates. But the fact that people would seize on this minor fault to promote a full-on panic was not an obvious consequence. At the same time, as improbable as SBV's collapse is, it was nonetheless perfectly plausible and foreseeable—as described above—that some bug in the financial system would start to make itself known, as the Fed kept hiking interest rates. 

The whole affair, therefore, is a confirmation of what one character in John Dos Passos's Manhattan Transfer calls "the peculiar predominance of luck in human affairs." It was, in fairness, an even more predominant feature of human affairs in Dos Passos's era than ours. His great novel is full of characters whose fortunes were made and lost overnight by fluctuations in the market. One character early on in the novel proclaims his intent to save up for his family's future, and his interlocutor tells him he is wasting his time: "Ain't no good in savin," he says. "I saved for ten years and the savings bank went broke and left me nutten but a bankbook for my trouble." And the character who speaks of the "peculiar predominance" is himself a ruined former titan of Wall Street, who addresses his tragic example to fellow "plungers."

Dos Passos's world of financial panics and banks that vanish overnight, taking a lifetime's worth of work and saving with them, was one that predated the existence of the the FDIC (Dos Passos's novel recounts events from the opening three decades of the twentieth century; whereas the FDIC was established in 1933). Now that federal insurance covers all deposits at mainstream banks up to $250,000, most people don't need to fear that a single panic or bank failure could wipe out their life-savings. Still, most of us would rather not have to rely on the FDIC caps if we can possibly avoid it; businesses may have deposits they need to make payroll in excess of the 250k limit; and all in all, the events of the last few days must make us feel like our world is closer to the unstable financial system Dos Passos described in 1925 than we would like. 

Depositors at SBV with savings above the FDIC limit will now reportedly be covered as well, thanks to an emergency intervention by federal regulators. Clearly, we are living in a somewhat more stable and well-ordered financial world at least than the one in Dos Passos's novel. Yet: the very fact that such extraordinary interventions were necessary shows the urgency and gravity of the situation (all of this unfolded in only three days); it also illustrates the continued salience of Dos Passos's line about "the peculiar predominance of luck in human affairs." The fact of the matter is that—generally speaking—it is safe to bet on the most likely scenario. But the point of the "black swan" argument is that, given enough time, the unlikely will also occur. The improbable therefore cannot be neglected.

In a passage from his treatise on Rhetoric, Aristotle cites a paradox current in his day asserting that "One might perhaps say that this very thing is probable, that many things happen to men that are not probable." Aristotle goes on to gloss the apparent contradiction more fully: "[T]hat which is contrary to probability nevertheless does happen, so that that which is contrary to probability is probable. If this is so, that which is improbable will be probable." (Freese trans.) This is the essence of the black swan insight. Any given improbable event—such as the failure of a massive and basically-solvent bank due to a single disappointing loss on ultra-safe Treasury bonds—is unlikely and therefore hard to foresee. But that something unlikely will happen is a probability bordering on a certainty. 

We must therefore take seriously the unlikely—and take steps to protect ourselves against it; otherwise we will truly be back in Dos Passos's world, and forced to rely on luck as the most predominant feature of life. Which may be fine with us, so long as our luck holds out. But what happens when it turns? Then we will be just another of the "plungers" who litter the pages of Dos Passos's novel—sad instances of people who took too big a risk and trusted too much in luck, only to see it fail.