Will Wilkinson:To prevent future crashes. I think most of these are pretty good. Explanations for each principle in Taleb’s FT piece.
1. What is fragile should break early while it is still small.
2. No socialisation of losses and privatisation of gains.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.
5. Counter-balance complexity with simplicity.
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”.
8. Do not give an addict more drugs if he has withdrawal pains.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
10. Make an omelette with the broken eggs.
2 comments:
It's a great piece and very thought provoking. But alas it's the wish list of an academic unencumbered by the so called "real world."
As Yves Smith writes, this is a list that she is "highly confident will never be implemented."
Felix Salmon notes that "in many ways that’s the strength of this piece: it both must be implemented and can’t be implemented at the same time."
Salmon continues:
"Taleb’s first principle is that 'nothing should ever become too big to fail'. But all economies have too-big-to-fail institutions; they always have, and they always will. Looking at the rest of the list, how on earth do you stop the financial sector from awarding its employees bonuses, or creating complex products? Derivatives are, at heart, bilateral contracts: how can you ban two consenting adults from entering in to such a contract?"
I do think that you will see some progress on some of these fronts; there may be some new rules regarding executive compensation, and for sure there will be more regulatory oversight of the complex derivatives market.
There will still be businesses to large to fail, but the Fed will have more authority outside of the banking sector to take over should something go wrong.
But you will still have some very large companies and some very complex financial markets.
Taleb's rule that no firm be too big to fail seems to me to be just a derivative of the concept of a perfectly competitive market, whereby no single firm is large enough to exert unequal influence on the market.
Here's a Q: is Walmart too big to fail? It employees over 2 million people, and a Walmart failure would have ripple effects throughout the numerous vendors that supply Walmart their goods to sell.
Not to mention that in many communities Walmart has driven out most of the competition, to the extent that many consumers depend upon Walmart as their source of consumer staples.
Now one might say that Walmart would never fail; that in any economic downturn Walmart comes out better than any other retailer, etc.
And in general I agree that it's not likely that Walmart fail. However, I never thought that Merrill Lynch would fail, or Morgan Stanley, or Wachovia.
So the point is that while it may seem unlikely now, that doesn't mean it cannot happen.
And let's also hypothesize that in any economic environment whereby Walmart is jeopardized, that other retailers would probably be hurting more, and may not be in a position to move in and scoop up the business from Walmart should Walmart fail.
So again I ask: is Walmart too big to fail? Perhaps we should be grateful when we see some communities put restrictions on the expansion of Walmart.
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