Rules to Live By

Here are ten rules that Nassim Nicholas Taleb proposes in an article in the Financial Times to prevent a future financial crisis. These look pretty much like "common sense", but apparantly legislators and regulators prefer a more "laissez faire" approach to life, you know, the kind where you get that free roller coast ride with bubbles and panics, one day you have a job and money in the bank, and the next day you are on the street and broke. That's right, the life of "freedom" from all those FDR "red tape" regulations that Republicans and Democrats on the payroll of lobbyists from Wall Street made sure were removed over the last 20 years giving us first the Savings & Loan fiasco, then Long Term Capital Management's collapse, and now the Wall Street meltdown:

Ten principles for a Black Swan-proof world

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system.

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”.

5. Counter-balance complexity with simplicity. The complex economy is already a form of leverage: the leverage of efficiency.

6. Do not give children sticks of dynamite, even if they come with a warning.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is denial.

9. Economic life should be definancialised. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

10. Make an omelette with the broken eggs. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself.

Go read the original. I've left out all the details and just given you "the rules".