Nassim Taleb on the economy: ‘We still have the same disease'

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/we-still-have-the-same-disease/article1286246/

On the anniversary of the spectacular collapse of Lehman Brothers, Nassim Nicholas Taleb is one of those people who can say, “I told you so.” For the past decade, he's been warning that the global economy has become far more vulnerable to unpredictable events that can cause vast disruption. He famously foresaw the credit crunch that brought the financial system to its knees.

Mr. Taleb is a Wall Street derivatives trader who became an academic specializing in the study of randomness and probability. In May of 2008 he published The Black Swan: The Impact of the Highly Improbable. It argued that most economists and bankers live in a dangerous fantasy world in which they imagine they can control the future. The book takes its name from the fact that all swans were once believed to be white – until black swans turned up in Australia. He loathes bankers, central bankers, and economists, not necessarily in that order, and thinks that banks should be run like public utilities. “My major hobby is teasing people who take themselves and the quality of their knowledge too seriously,” he says. He has advised British Conservative Leader David Cameron, and last week testified before the U.S. Congress on the financial crisis.

Mr. Taleb will speak Tuesday in Toronto to kick off the new season of the Grano lecture series. The theme of this season's series is risk and the next global crisis. Margaret Wente caught up with him on Friday to ask him what (if anything) we've learned.

Margaret Wente: Happy days are here again. The central bankers say the recession is over. The markets are buoyant. Can we relax?

Nassim Taleb: Not at all. Central bankers have no clue. In the first place, the financial crisis was not a black swan. It was perfectly predictable. They ignored the phenomenal buildup in leverage since 1980. They acted like airline pilots who'd never heard of hurricanes.

After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.

MW: But aren't those the very problems we're supposed to be fixing?

MT: They're all still here. Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient's symptoms – and transformed the tumour into a metastatic tumour. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.

MW: Are you saying the U.S. shouldn't have done all those bailouts? What was the alternative?

NT: Blood , sweat and tears. A lot of the growth of the past few years was fake growth from debt. So swallow the losses, be dignified and move on. Suck it up. I gather you're not too impressed with the folks in Washington who are handling this crisis.

Ben Bernanke saved nothing! He shouldn't be allowed in Washington. He's like a doctor who misses the metastatic tumour and says the patient is doing very well. The first thing I would tell Chinese officials is, how can you buy U.S. bonds as long as Larry Summers is there? He's a textbook case of overconfidence. Look what happened to Harvard's finances. They took a lot of risk they didn't understand, and it was a disaster. That's the Larry Summers mentality.

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/we-still-have-the-same-disease/article1286246/">More...

.... should make themselves familiar. There are a couple of video interviews on the net if you don't have time to read books.

IMHO this guy, with his theories about black swans and being fooled by randomness, has it figured out. His ideas apply to all of life, not just financial markets.

Taleb is spot on, in my opinion.

What we really have done is prevent people from defaulting on their unpayable debts through bankruptcy in order to shore up large institutions. But now we have the worst of all worlds - an awful lot of people still have awesome debt loads, even if some of them have had their payments reduced. However the consumer overall has gotten very little benefit due to the rise in credit card rates.

Plus, the massive amount of public debt is causing inflation for necessities even in a time of rapidly dropping incomes. So now the most vulnerable in our society are basically being hit with a hidden regressive tax.

We are very unlikely to see a sustained recovery with real incomes falling for most of the population, and taxes must rise due to demographics.

To produce a sustained recovery, we should reform bankruptcy reform. I think the policy of supporting creditors was a terrible mistake.

Add to that the circumstance that creating a situation in which banks can borrow money for basically nothing and lend it to the Fed by buying Treasuries to make their margin, and we are now seeing lending to businesses and consumers contract. This has been going on for months, and it will produce a second economic collapse.

I am very disappointed that the Democrats did not fix the bankruptcy problem. I am questioning everything political right now. I no longer trust anyone. I think the Democrats in DC have been better in some respects than the GOP would have been, but right now in some respects they seem to be trying to transform themselves into a big business party. This leaves the average person with little choice, and I strongly suspect that some teabaggers are people who have been consistently voting Democrat.

We threw over a trillion dollars into banks. We have at least another 500 billion that is going to rebound on us through the very misguided mortgage maneuvers with the GSEs, and we have additional FDIC liabilities.

If we had spent more of this money by directly helping consumers to pay off debt, the banking system might be in better shape than it now is, but certainly consumers would have more residual income. Without income consumers can't buy, the companies can't expand very much, and the economy can't expand.

http://www.hussmanfunds.com/rsi/PhoenixVolume.htm


Familiar durable bear-market bottoms stand out, like in 1982 and 1974. These rallies had strong returns that coincided with large bursts of trading volume during the first six months of the rally. There are a couple of examples, like 1998 and 2003, where bull markets had a good start on mediocre expansions in volume. But for the most part, in the cases where volume contracted the bull market beginnings have been uninspiring. More common is a strong increase in volume that coincides with gains of 20 to 25 percent during the first six months. It's clear that this year's rally is an extreme outlier in the dataset, with above-average returns and a continued contraction in volume from the levels of trading in March.

Even so, some analysts have become optimistic because volume trends first leveled off, and then have risen marginally over the last few weeks. But almost the entire rise in volume during the last month and half has come from a handful of stocks. Examples include Fannie Mae, Freddie Mac, Citigroup, AIG, and Bank of America. These are just five. There are a couple of other stocks that are interchangeable with these companies and would produce similar results – but the characteristic they all share is that they are financial stocks that only recently were on the brink of collapse. And since the Government's rescue of these and other financial firms, the group has risen up from the ashes. For ease of reference, we'll call these Phoenix stocks.

Wikipedia: "Cancer is a class of diseases in which a group of cells display uncontrolled growth (division beyond the normal limits), invasion (intrusion on and destruction of adjacent tissues), and sometimes metastasis (spread to other locations in the body via lymph or blood)."

This system we live in is a cancer, killing it's host: the carrying capacity of this planet, the ecosystem that the cancer growth and all life is dependent from.

All talk of and for continuing growing "when this recession is over" is disease speaking.

"Human beings are a disease, a cancer of this planet.":
http://www.youtube.com/watch?v=kndX3tVxCt8

I didn't think Parson Malthus still had a fan club.

Just out of curiosity ... How many billions of us need to be eradicated to restore the "host" to "health"? And which ones?

From the biosphere's perspective...I can't say whether humans are cancer cells...viruses...or bacterium.

But the analogy fits so well...it really is a no brainer.

I'd think Americans should be the 1st to go....since they use the most energy? But then these bacteria have the greatest production of toxins...so they will probably just continue steal and kill for what they need? For their bacterium god says...it's OK.

All types of bacterium have gods that tell them to "go forth and multiply"?

BOTTOM LINE? Brick wall up ahead...some are at least looking for the brakes....anyway....

Bottom line ... Brick walls are only a deterent to those lackilg the imagination to go around or over or under them.

Frankly, you scare the he'll out of me

http://www.chrismartenson.com/crashcourse


Take the time to watch this and understand it...?

If you were standing on some railroad tracks...and looked up to see a train coming...would you be scared? Or would you shame/ridicule those who were paying attention?

That Crash Course is the best linking of economics, environment and energy I've ever seen. I read his site regularly.

This planet can support all our needs. But not our greed.

...one of these diseases is man." -- Nietzsche

Interesting, thank you for posting. I remember reading his book a few years ago and thinking he was either off his rocker or brilliant. A lot of the idea is obvious - that we really can't prove anything will or will not happen - but he proved it well. The chapter devoted to the ridiculousness of bell graphs was, however...a bit ridiculous. But thank you for posting this interview - he's certainly a mind to watch.

I'd have to do some digging for the exact quote, but he also attributes the current crisis to having private profits and socialized losses. According to him, both profits and losses must be either private or socialized (e.g., no FDIC protection except for banks that are government-owned).