That's a question1 that came to mind when reading his op/ed in today's Financial Times, "Ten principles for a Black Swan-proof world", parts of which seem strikingly simplistic. Below are a few examples, with commentary.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
I wouldn't be surprised if nuclear plant managers do have some sort of incentive bonuses -- and why wouldn't they? The lesson here should be that bonuses need to be structured so the interests of shareholders and managers (and, yes, taxpayers) are aligned, not that bonuses need to be eliminated. In the case of a nuclear plant manager, for example, his bonus might be tied to meeting certain goals for safety, efficiency, etc. Obviously, a bonus that encouraged him to ignore safety would be stupid, but there's no reason to structure a bonus that way.
6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
Why deprive investors of the means to hedge their risks? You could argue, as Soros has, that certain derivatives (e.g., credit default swaps) should be limited to those who have an insurable interest, but why ban them altogether?
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
Where to begin with this one? If citizens shouldn't depend on financial assets for their retirement, on what should they depend? On defined benefit pensions (which, aside from being scarce in the private sector, are themselves dependent on financial assets)? Taleb seems to be suggesting that business owners put all of their assets into their businesses instead of putting some into passive investments, but what of the majority of citizens who don't own their own businesses?
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.
Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.
"Clawing back the bonuses of those who got us here" makes some sense, but does Taleb really believe our economy ought to have "no leverage"? Does he envision people buying homes for 100% cash, with no mortgages? Wouldn't the more reasonable suggestion be that we have less leverage instead of no leverage?
The image above, of the Happy Days character Fonzie (played by Henry Winkler) jumping the shark comes from Media Bistro.
1For those unfamiliar with the phrase, see the Urban Dictionary's definition of "jumping the shark".
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5 comments:
Re #9:
"If citizens shouldn't depend on financial assets for their retirement, on what should they depend?"
All sorts of things.... Things that actually have durable intrinsic value.
Taleb apparently is one of the crowd that argues everyone should be a small business owner / merchant. In that hypothetical world, everyone is in business for themself offering a service, and financial stability comes from that, as opposed to toiling at rote jobs in massive beehive conglomerates in order to accumulate ethereal credits on a computer screen. I'm sympathetic to that. Financial instruments (from fiat money to complex derivatives) as we know them are an unnatural tool to depend on, they can blow up in our faces into their intrinsic value (next to nothing) or be used to manipulate the world out of proportion to ones actual (useful) talents.
He does keep it simplistic probably because he doesn't want to yet make the case for what I know he is getting at (An entirely new economic model, ala Venus Project, or post-scarcity economics). He calls it Capitalism 2.0. whatever.
I agree with Taleb that we should really depend as little on modern financial assets as possible. I think we should prioritize the ability to grow our own food, harvest our own energy, and not be dependent on a complex societal grid in which we have no way of assessing all the variables. Some neighbors of mine have a relatively small yard but they get most of the vegetables and fruit they need from their small garden. I'm learning to do the same. If food prices soar due to another commodity bubble they will hardly notice. I've read of others putting up a few solar panels and a wind turbine and removing themselves from the power grid. Think, once electric cars are cost effective and we have a kitchen appliance that grows our own meat for us (coming soon), what else would we really need to spend money on? Not a whole lot, with food and energy covered. Anyway, those are baby steps toward the technology-enabled end result of everyone being able to sustain themselves without working as a feudal peasant in a cubicle, blown from market crash to market crash caused by runaway speculation of the monied class and the stupid retail cheerleaders who enable them. Maybe one day we will trade units of energy for currency instead of central bank toilet paper, phantom ownership(lol) of companies on computer screens, or useless metal like Gold. Sure people should be able to have the option of participating in the beehive and being dependent on the Queen, but right now not many have the choice of sustaining themselves, shaltered from the incompetance or machinations of others, even if they want to.
"Taleb apparently is one of the crowd that argues everyone should be a small business owner / merchant. In that hypothetical world, everyone is in business for themself offering a service, and financial stability comes from that, as opposed to toiling at rote jobs in massive beehive conglomerates in order to accumulate ethereal credits on a computer screen. I'm sympathetic to that."
I'm somewhat sympathetic to that as well, but, like much of the rest of what he wrote in that piece, it's extreme, simplistic, unrealistic, and it throws the baby out with the bath water. As I've mentioned in our correspondence and on GuruFocus, if someone has the resources to buy a successful, established business (or a franchise of such a business), there are definite advantages to investing your money in that business versus investing in stocks or other passive investments. E.g., the good dentist might have been better off putting some of his seven figure portfolio into a Dunkin' Donuts franchise years ago.
Similarly, if you don't have that kind of money, but you do have the talent and drive to start your own business, that's certainly preferable than toiling at a rote job, as you put it. But as we noted in a previous post ("Questioning the Conventional Wisdom about the Benefits of Microfinance and Encouraging Entrepreneurship"), most people don't have what it takes for that. For those who don't, it would be better to focus on measures that enable them gain more satisfaction and security from their jobs, while aligning their interests with their employers' (e.g., not giving them benefits their employers can't afford, as Detroit did with the UAW).
Even for those who do start their own businesses though, Taleb's call for "definancialism" is too extreme. Why shouldn't a business owner be able to hedge his risks with financial products? I get Taleb's point that the financial sector has grown way too big as a percentage of the economy -- it's a obvious point, and one that the economy is already correcting (and would be correcting even more if the government weren't propping up some firms) -- but the advent of insurance, for example, and commodity derivatives increased the well-being and security of business owners.
"Think, once electric cars are cost effective and we have a kitchen appliance that grows our own meat for us (coming soon), what else would we really need to spend money on?"
Funny you should mention the idea of growing synthetic meat. Bill McKibben anticipated (and feared) that in a book he wrote 20 years ago, The End of Nature. I had to read that book in college (I was an environmental sciences major at a land grant school). That book may have been what first made me skeptical about environmentalism: all of McKibben's Chicken Little warnings that never came to pass, his exaggerations of manageable environmental problems into existential calamities, his guilt about using the fireplace in his cabin because burning wood released carbon into the atmosphere, etc. What's interesting, too, is that as something of a futurist and a techie you look to technology to bring about the sort of independent lifestyle most Americans had when we had far less technology. 150 years ago, most Americans didn't have to work in cubicles, and most produced their own food on farms. And yet they were still affected by financial crises, e.g. deflation.
"What's interesting, too, is that as something of a futurist and a techie you look to technology to bring about the sort of independent lifestyle most Americans had when we had far less technology. 150 years ago, most Americans didn't have to work in cubicles, and most produced their own food on farms. And yet they were still affected by financial crises, e.g. deflation."
That's somewhat true, although speculative financial crisises as we know them didn't exist before the international prolification of national central banks, paper money, and markets propogated as a tool of certain Machivellian royal families such as the House of Orange-Nassau, Hesse, etc. which used royal intermarriage (replacing Stuarts with the Hannovers for example) combined with politico-financial reform to stage coup'de tats in countries like England and the Netherlands.
Before, currency was made of coins, with metals that were useful. An updated, better verison of that would be trading energy units. But I digress.
Quality of life has increased with technology, i.e. my cubicle job is definately better than being a subsistinence farmer 150 years ago. So it is a bit paradoxical to look to the past for inspiration for future societies. However if you contemplate on it then it makes sense. We gave up autonomy for comfort as technology progressed, and now we are near a point where we can keep the comfort and reclaim our autonomy. So it wouldn't be the same lifestyle at all, it would be an improvement on both.
I think those that want to risk their livelihoods with complex financial instruments should do so, provided they are not too big to fail. (BTW - why on earth do to too-big-to-fail banks have the same capital requirements as much smaller, non-systemically important ones?!) Then again, in the real world, complex hedging leads people to not do the DD they would have done in the first place, so in practice I'm not so sure I disagree with Taleb. Kind of like the oil speculators who used the example of Joe the Plumber buying oil fuures to hedge against filling up his Plumbermobile, when in reality the promoters of that theory were leveraging up their AUM to the hilt in unregulated Wild West commodity markets. It's a nice picture to paint for an intuition-pump, but in practice greed takes over, and complexity begets complexity until it becomes a chaotic butterfly-effect system that crashes on a moments notice. Then people who had nothing to do with the crash have to deal with the aftermath, because we are all plugged into the same societal grid. Personally, I'd like to opt out of that universe, or severely limit my involvement to that which I can afford to lose. Sure I can buy TIPS to hedge against inflation to an extent, but let's face it, if high inflation hits I'm still screwed.
Regarding growing meat, it can be done now in a laboratory. I expect the food industry to fight very hard against consumer independence, as every other entrenched institution has done, even if they resort to red herrings (what kind of improvement to gas is ethanol?!? - bah!) or fear tactics (using the Luddite environmentalists/all-natural types). It might not be until the centrally planned Asian economies surpass us in quality of life that americans get the impetus to demand the radical technological advancement that is possible. I don't want to have to move to Asia.
BTW, as a side note, since you have covered Tesla Motors before, you might be interested in learning about these English blokes giving Tesla a run for their money.
JK,
"That's somewhat true, although speculative financial crisises as we know them didn't exist..."
The 19th Century had speculative financial crises and depressions too, e.g., The Panic of 1819, The Panic of 1837, The Panic of 1873. There were speculative booms and busts associated with canals, railroads, etc.
"Before, currency was made of coins, with metals that were useful. An updated, better verison of that would be trading energy units."
Back when our currency was backed by gold, deflation was a curse for farmers, since it meant that real interest rates were high for them when they borrowed to buy seeds and other inputs. Remember William Jennings Bryan's "Cross of Gold" stump speech? Re trading energy units, I read something interest recently (I think in the FT). Some energy trader said that the global currency is actually oil, and dollars are priced in terms of oil, and not the other way around.
"So it wouldn't be the same lifestyle at all, it would be an improvement on both."
This is an interesting point. A couple related thoughts: I think I've mentioned the book to you before, but Neil Stephenson's novel The Diamond Age envisions something like this, powered by nanotechnology. One group decides to live like 19th century Victorians, enabled by technology. E.g., they ride horses, but robots pick up all the horse crap and vaporize it, etc. Another thought about the point you made about autonomy. Some have suggested that if it weren't for FDR's rural electrification projects during the 1930s, a lot of rural communities would have evolved more autonomously, with diverse sources of energy including windmills. Once the government lays out the power lines for cheap coal-fired power, there's not much room for competitors to pop up.
"BTW - why on earth do to too-big-to-fail banks have the same capital requirements as much smaller, non-systemically important ones?!"
A good question.
"Kind of like the oil speculators who used the example of Joe the Plumber buying oil fuures to hedge against filling up his Plumbermobile"
I don't think that was the best example. One idea floated by an integrated oil company CEO made a lot of sense to me though: a gas card where people could lock in gas prices when they were low, and the oil company would handle the futures aspects of it.
I get your frustration with the financial sector, and I share it, but it's worth remembering that it wasn't always like this. There are a number of investment banks in this country that most people have never heard of, that have taken pride in helping to build their communities: floating muni bond offerings that paid for the local hospital, IPOs that helped local businesses expand, etc. That's work that benefits society, and that's what finance should do. Again, no point in throwing the baby out with the bath water.
Thanks for that car link. I'll have to check it out.
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