In a display of cogent and rational thinking to what many have ascribed as ‘complex issues’ surrounding banker bailouts, Nassim Taleb, famed author of The Black Swan, told Bloomberg Television on Tuesday that, for him, the cause of the breakdown in the financial system is a simple one: reckless Wall Street practices are systemically protected by way of rewarding bankers for taking on ‘risk’ while government insures them against losses through the use of taxpayer money—thereby, de facto, creating a risk-free environment for bankers to gamble with bank deposits.
And when the bankers lose the bet, government’s threat of force collects for the next round of banker bets.
That, Taleb said, is an “untenable” model, especially within a social construct of a promised one-man-one-vote political system. By rewarding bankers like successful hedge fund mangers irrespective of performance, Wall Street cronies have been legally enfranchised into “a compensation scheme, and nothing more.”
“The bank bailout is a masquerade of economics,” he continued. “The banks have made . . . $2.2 trillion in the past five years. It’s a business that doesn’t make money . . . and projected another $5 trillion in the next 10 years.”
Bankers salaries and bonuses have been served up by society, not the other way around, according to Taleb. “They [banks] aren’t hedge funds,” but are compensated like hedge fund managers who enjoy no risk; that, in the end, essentially, imposes an accumulated and system-breaking deferred tax to an economy when the house of cards finally falls. And all the mal-investment along the way to the inevitable bad ending sucks from the economy and ends up in the pockets of bankers in the form of salaries, fees and bonuses.
In a Business Week 2010 interview, Taleb said, “The problem is getting runaway. It’s becoming a pure Ponzi scheme. It’s very nonlinear: You need more and more debt just to stay where you are. And what broke Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.”
Having morphed and devolved over time, Taleb characterizes the U.S. today as a “weird combination” of capitalism, which Maynard Keynes stated “can probably be made more efficient for attaining economic ends than any alternative system,” combined with Marxian Socialism, which Keynes believed is “a doctrine so illogical and as dull.”
The economic model first laid out at Brenton Woods in 1944 has changed; it’s developed into a “weird combination” that many describe as crony capitalism for the top 1%. Therefore, the banking cartel stands in the way of the OWS’s 99%, and the righteous grievances of the protesters must be addressed immediately before the possibility of the movement turning into a “second generation” Marxist uprising, Taleb added.
“It [support of the banking cartel] is like a tax on citizens; it’s a transfer of money to compensation of the banks. This is compensation, salary plus bonuses, of bankers,” Taleb continued. “This is a huge amount of money, and people are worried about how much we spend on the military.”
Taleb squarely assesses blame on elected political leaders for the breakdown. These folks are elected to manage a system so complex that “they [politicians] themselves don’t know what risks they have.” Taleb, then, must disagree with those who claim the greed of the America people was a strong as Wall Street’s. Would a buyer of sub-prime mortgages pay the equivalent amount per $1,000 as he would pay for a U.S. sovereign debt obligation if the rating on the sub-prime mortgages were rated to reflect a reasonable assessment of its true risk?
So what’s Taleb’s solution? He said, institute the spirit of the Hummurabi’s Code.
Hummurabi, the Babylonian King, said in 1750 B.C., “If a builder builds a house and the house collapses and causes the death of the owner of the house, the builder shall be put to death.”
Taleb said the most effective way to ferret out purposefully hidden risk is to do as the Romans once did, enforce Hummurabi’s Code. “If you build a bridge, and you’re the engineer, you have to spend a few nights under the bridge,” he said.
With the use of similar rules for bankers, today, Taleb is convinced that Wall Street would no longer hide or miss-price risk and that it would no longer need to seek out suckers to buy that risk.