Friday, March 11, 2011

Nassim Taleb on Charlie Rose

The author of the Black Swan talks about his new book “The Bed of Procrustes: Philosophical and Practical Aphorisms”

Favorite Aphorism
"The Prophet is not someone with special visions, just someone blind to what others see"

Ben Bernanke
Helicopter Ben was completely fooled. He didn’t understand the risks of the system and thought we were in a great moderation.  He couldn’t figure out why the crisis took place and what the solution should be.

The System
The world is so complex that we need more “reserves” (buffers/redundancy) against unpredictability which makes the world less forecastable. For robustness in the system we need a lot of redundancy and a low level of debt (this will result in significant belt tightening). In a society with less debt bankers can be supremely incompetent but can’t hurt the system as much.

Example: mother nature gave us two kidneys. The exact opposite is debt – instead of having two kidneys, we borrow one.

Obama Administration
When Obama came into power he appointed people who were part of the system who got us into these risks. He should have immediately tried to “cut the cancer” similar to what Cameron did in the UK. Instead they converted private debt to public debt. They punished savers and bailed out debtors.

Stimulus packages “fragilize” the system further.

Two moral problems with bailouts:
1.      Innocent pays for the mistakes of the wrong doers
2.      Transferred debt and risk to future generations

Europe has less debt than the U.S. and thus is more robust. They also understood problem of too much debt early on.

Not against globalization, but we need to understand that globalization reduces predictability and results in more winner take all effects – overspecialization (leading to lower inventory and more volatility) and fragility. As a result, globalization can destabilizing. It is not a panacea.

Overall Metaphor
In Korea in October 2009: someone from the IMF showed economic projections for 2010 through 2015. Taleb challenged him to show his projections for 2007 and 2008 that were made in the early 2000s. His main point: You should be as wrong as you want without affecting other people” i.e. the “expert problems” shouldn’t be allowed to hurt society.

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