Nassim Taleb, the author who gave us the Black Swan, has written an editorial along with Mark Spitznagel, in Tuesday’s Financial Times that told us more — quite economically — about our current economic troubles then dozens of hundred plus-page economic white papers, voluminous government studies or the 89-page blue print for regulatory reform recently released by the Obama Administration ever could have.
He told us something we already knew but consistently try to ignore: We have too much debt. That goes for government business and individuals.
Perhaps we liked the piece so much because it echoed a lot of things we have written here. Particularly the folly of entrusting our economy to the people who either could not recognize the risk in the first place or were directly responsible for it. Taleb wrote, “It is sad to see that those who failed to spot the problem (or helped to cause it) are now in charge of the remedy.”
The build up of debt along with the explosion of complex derivatives made us more vulnerable but our leaders didn’t see this or ignored it. As we noted here, “If we knew of the interconnectedness of large financial institutions—as Bernanke noted — how is it that regulations in recent years were being relaxed instead of tightened? How is it banks were allowed to increase leverage rather than be forced to reduce it?”
That goes right to Taleb’s point that the complexity of globalization makes economic projections less reliable, which makes an economic system that relies on such projections and complex mathematical models much more fragile.
Taleb pointed out that debt needs to be replaced by capital and uses the dot com bubble as an interesting example. The dot com crash — while painful to many — did not cause systemic risk to the wider economy because those companies able to raise equity (from those willing to buy into the “new paradigm” tripe) “had no access to credit markets”. Many investors were smart enough to get out with profits. Imagine if those profits where based on borrowed money leveraged based on valuation projections instead of naïve investors dying to get into anything with .com in its title who believed things like profit/loss didn’t matter anymore.
I guess you would have what we have now as our current crisis is due in large part to belief in another new paradigm, that housing values would grow at 10% plus in perpetuity.
Taleb notes stimulus packages that increases government debt makes mattes worse because it exposes us to the risk of more economic projections. He notes a miscalculation in those projections in relation to central bank money creation can be the difference between inflation and hyper inflation.
Tags: Black Swan, Taleb
