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Posted 15 June 2009

Black swans in a perfect storm? The worldwide financial meltdown of 2007-2009

“Naturalists once believed that black swans did not exist, that all swans were white, since only white swans had been reported before. The discovery of black swans in Australia’s interior was a shock predicted by no one,” said Professor Malcolm Gillis who recently gave a special lecture at UCD on the worldwide financial meltdown of 2007-2009.

According to Malcolm Gillis, Professor of Economics at Rice University, Texas, a flock of black swans appeared on the financial scene in 2007 – 2009.

“Financial perturbations and dislocations have been recurrent features of post World War II financial history. Since 1975 alone, the IMF has counted 113 episodes of financial crisis in 17 countries, including five crises that were especially serious. And, from time to time, financial institutions have faltered seriously, as in the S&L crisis of the 80s. Regional housing markets have undergone cyclical ups and downs, and we have experienced periods of capital flight. In the 70s and 80s there were bailouts of Chrysler and S&Ls.”

But never before have we experienced so many simultaneous financial insults, claimed Professor Gillis. “Black swans arrived in force, bringing a headlong process of rapid globalisation to al least a temporary halt, while leading to a near complete breakdown of trust in financial circles.”

In his special lecture at NovaUCD, Professor Gillis examined six root causes of what he called ‘The Perfect Financial Storm’ and the interplay between them: Excessive leverage; perverse pathological incentives for banks and other financial institutions; misguided and lax financial regulation; poor applications of good economic theory; financial engineering carried to extremes; and investor gullibility.

“Throughout 2008 all six factors came together to yield a near-perfect worldwide financial storm,” he said. “The pain is far from over, especially as downgrades of collaterised securities trigger chain reactions leading to more write-offs of banks’ prospective losses.”

Professor of Economics at Rice University, Texas, Malcolm Gillis, at NovaUCD – Black swans in a perfect storm? The worldwide financial meltdown of 2007-2009


Biosketch of Professor Malcolm Gillis:

After distinguished careers in Harvard and Duke Universities, Professor Malcolm Gillis served as President of Rice University for more than a decade, and is currently a professor of economics at the university.

Before assuming his university leadership positions, Professor Gillis was a consultant on economic issues to organisations ranging from the World Bank to the governments of Colombia, Ecuador, Bolivia and Indonesia. Until 2005, he served on the board of directors for the Federal Reserve Bank of Dallas.

He has dedicated more than 25 years of his professional career to teaching and to applying economic analysis to important issues of public policy spanning nearly 20 countries. He has published more than 70 journal articles and authored several leading economic textbooks.

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Black swans in a perfect storm? The worldwide financial meltdown of 2007-2009