April 3, 2009

THE HILARIOUS THING ABOUT BLACK SWANS...:

A Conversation With Nassim Nicholas Taleb (Washington Post, March 15, 2009)

Every time I saw [Federal Reserve Chairman Ben] Bernanke [on television], I would have a fit of rage. He claimed that we were in a period of "great moderation." He did not understand that Black Swans are preceded by low volatility and the buildup of hidden risks. He mistook absence of volatility for the absence of risk. It was like someone sitting on dynamite and saying "It's okay, we're safe because nothing has happened."

In a complex system, things that are fragile should be allowed to fail very fast. [Former Fed Chairman Alan] Greenspan and Bernanke let something fragile, like the banks, survive very long. The longer it takes to break, the worse the outcome.

That's why I think Obama needs to start with a new economic team -- Treasury Secretary Tim Geithner and Lawrence Summers were among those who didn't see this coming in the first place. He needs new people who understand complex systems.

What about economist Nouriel Roubini? Wasn't he calling attention to the potential danger?

Yes, Roubini got it right. But Roubini wasn't right because he's an academic economist. He was right because he is a very insightful fellow. He is so good he managed to surmount his education in economics.

Other than you, who would be the right choice for the Obama administration?

I know who should not be on his team -- anyone who did not understand that the world financial system included more risks than it showed. This leaves plenty of individuals outside the administration and outside the economics profession who warned about it. Aside from Roubini, the closest thing in the economics profession would be Ken Rogoff. I would also require that the person be a business person -- someone who did not make a career writing papers to impress fellow economists.

So what's your prescription for the economy?

The first thing we need to do is to get rid of the vicious bonus system at banks that encourages you to take these huge hidden risks. When it all blows up, they still have their bonuses, because the Black Swans happen only every so often.


...is that contrary to his own thesis, they happen regularly and they're the things he warns us about. The entire concept is basically an assertion that he's smarter than everyone else. Well, except Nouriel Roubini.

Posted by Orrin Judd at April 3, 2009 5:34 AM
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