Nassim Nicholas Taleb on White Swans

Here is Nassim Nicholas Taleb, the author of the book The Black Swan talking about the failure of risk modeling and the role it played in the 2008 financial crisis:



The discussion of The Great Moderation is interesting. His thesis is that there was an accumulation of risk "only in the tails". With hindsight, this is correct. But it isn't clear to me that this claim is rock solid. The bit I agree with is that the really big risks always comes out of the blue and are unaccounted for. Where I begrudge Taleb is his calm assurance that this was all knowable in advance. It wasn't. The real and growing risk of 2008 wasn't a "fat tail" or "an accumulation of risk". These are empty words. The real risk was the confluence of risks documented in Michael Lewis's book The Big Short: the corruption of Wall Street mortgage securitization, the fradulent mortgage brokers with this NINJA loans, and the connivance of the rating agencies which had been captured by Wall Street and gave AAA ratings that lured big and supposedly "knowledgeable" investors to their doom, i.e. the pension funds, the municipalities that parked money is supposedly "safe" AAA securities.

Taleb is a salesman. He dances in abstractions and sounds very knowledgeable. But his words are empty. Real knowledge rests on facts. He has no facts. He is a theoretician living only in the clouds with after-the-fact "truisms".

Don't get me wrong. I enjoy listening to him. I like a lot of what he says, but I get frustrated because it is too theoretical and not enough factual.

I get really frustrated when he makes ridiculous statements like:

What happened to all that collected wisdom of 3000 years, the Bible, the Koran, early Christianity, the Romans, everyone learned the perils of debt. Now what happened to that wisdom in the business world. If you are facing uncertainty it is a bad idea to have private debt. I think it is criminal to transform private debt into public debt because you are taxing the unborn.

This is absolutely idiotic. This claim of "3000 years of wisdom" is a joke. There is no such thing. The claim that when you "face uncertainty" it is a bad idea to have private debt is a very bad joke. Life is always full of uncertainty. Is Taleb saying "never have any private debts"? That is nutty. And the idea that public debt is somehow worse than private debt is sheer nonsense. A debt is a debt is a debt. For some things private debts are effective, for others you need public debt because no private person could handle the debt. The invention of the stock market was to beef up the size of private debts, but even with the huge private firms of today, there are still some undertakings for which no private consortium is large enough to fund it. Taleb reminds me of so many academics I've known who fall in love with their own patter and abstractions. What he is saying is ridiculous.

What bugs me is that Taleb has been seduced by his notariety. He now is out selling half-baked ideas, selling himself as an instant expert on areas where he has no expertise. He has prostituted himself to fame.

The blather he goes on about public debt is dangerous and bad. Right now the world needs a Keynesian stimulus. His "warnings" about debt are part of the problem because they are stopping governments from doing what is essential: provide the missing demand until the private sector recovers. He is presenting himself in the camp of Hoover's Secretary of the Treasury, Andrew Mellon, with his idiotic "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people". Taleb is calling for "very severe austerity measures". This is nutty. This is a moralistic view that debt needs to be atoned for by blood, sweat, and tears. Keynes showed this is not true, but Taleb is a fool and hasn't read Keynes and hasn't studied history. He is presenting himself a Andrew Mellon redux.

One thing that really bugs me about Taleb: He shows no awareness of the suffering of average people. He lives in the abstrations of the financial markets. Bankers find it very easy to tell others to "tighten their belts" because they have never suffered poverty and starvation. In the real world, a Great Recession means 15 million are unemployed and suffering. Keynes focused on that suffering and wanted the society to get those resources back to work so there would be more to share. The poor are keenly aware when production falls below the frontier of possible production because the missing goods are exactly what is missing from their tables. The rich never miss this because their tables are always full. It is very easy for a banker, for a rich person, to prescribe "belt tightening" to others.

I have to make a mental not to refuse to listen to Taleb again. He has gone over to the dark side.