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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