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Interview With Nassim Nicholas Taleb
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. You see a lot of people walking around who are massively wealthy who never made a penny for their investors.
Look at [former Treasury secretary Robert] Rubin at Citigroup. He made and kept a $115 million bonus while the taxpayer has to bail them out. We should not be paying the Bob Rubins anymore. We have to have clawback provisions to make sure that we punish people for their bad bets.
I am in favor of partially nationalizing the banks for this reason and banning complex derivatives. Nobody understands them. I would also start indicting the vendors of these financial risk management systems that everyone relied upon to tell them everything was okay when it wasn't.
How do you define a Black Swan? If they're so unexpected, how can we prepare for them?
A Black Swan is an exception, like the bird. It is an event with massive consequences that is unexpected. My idea is not simply to say that these things happen. My idea has been to identify the vulnerabilities, the spots where people are driving the school bus blindfolded. In banking, I identified a huge amount of risk taking on the part of banks that were using bogus models to estimate their risks.
It was so painful to watch the banking system become so fragile to the Black Swans. Now there is wealth turning into air as we speak.
What do you see ahead? What do you make of the mainstream economists who predict that the economy will turn around later this year or next?
Look, globalization has created this interlocking fragility. At no time in the history of the universe has the cancellation of a Christmas order in New York meant layoffs in China. So for a while it created the illusion of stability, but it has created this devastating Black Swan.
Complex systems do not like debt. So it will proceed to destroy tens of trillions in debt until society rebuilds itself in an ultraconservative manner. We are in for a worse ride than people think.
People have the problem of denial. This is one of the things I learned in Lebanon. Everybody who left Beirut when the war started, including my parents, said, 'Oh, its temporary.' It lasted 17 years! People tend to underestimate the gravity of these situations. That's how they work.
Is this crisis going to last 17 years?
Unfortunately no, complex systems cascade much faster than that. However, the destruction will be deeper than people anticipate. It will bring down a lot of people.
My rosy scenario is that a better economic environment will develop, a low-debt, robust growth world, in which whatever is fragile will be allowed to break early and not late.
My nightmare scenario is that the government saves Citibank once again, as well as the other banks, and business resumes as usual. Then, the next time the system breaks, it breaks much, much bigger.