On anniversary of Lehman collapse, author of The Black Swan can say 'I told you so'
Margaret Wente
Originally published on Sunday, Sep. 13, 2009 11:09PM EDT">Last updated on Tuesday, Sep. 15, 2009 02:57AM EDT
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.
MW: You argue that globalization and modern technology have made the world financial system far more fragile than ever before. How?
NT: Globalization and the Web create worldwide mass effects, whether positive or negative. We have planetary fads that cause random variables to have bigger spikes than ever before. Variables that used to move 10 per cent now move 30 per cent. The whole planet can pull its money out on the same day. The Internet is what bankrupted Iceland! You in Canada destroyed things with your BlackBerry.
MW: You also say that competition among big companies is the Achilles heel of capitalism. What do you mean by that?
NT: If you make corporations compete, sometimes the one that appears most fit for survival is really the one that is most exposed to the negative black swan. What happens is that if you make $4 a share but you're betting the ranch, like GE, the analysts will love you. But if you make only $2 a share with no risk on your book, they'll say you're not doing well. All the incentives are perverse.
MW: We here in Canada feel pretty good because our banks are in good shape and we've escaped relatively lightly. What's your take?
NT: That's true. You guys are slightly more insulated than others. But there's no way you can escape the mistakes made by others. They'll just cost you somewhat less. But if we wind up with hyperinflation, Canada will be the best place in the world to be. You've got energy and minerals. You're not overspecialized. You're self-sufficient.
MW: Up here our government is promising we can get rid of our deficit by 2015. Any views on that?
NT: Governments never got projections right before, so why should they now?
MW: So if everyone is still on the wrong track, what's the right track?
NT: My whole idea is to lower risk in society by developing a system that can resist human error, rather than one where human error rules. The first step is to make sure that no financial institution is too big to fail. Next, make sure governments don't favour big companies. Governments should also decrease the role of economists – they're no more reliable than astrologers, and they do more damage.
MW: Now that you've painted such a rosy outlook, do you have any advice on how individuals can guard against losing 40 per cent of their money in this extremely risky world?
NT: My advice is that instead of investing in medium-risk securities, you should put most of your money in very low-risk securities, and a little bit in high-risk securities. Then you might get a good black swan. Also, it's good to have more than one profession, in case your own profession goes out of style. A Wall Street trader who's also a belly dancer will do a lot better than a trader who winds up driving a taxi.
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