Thursday, August 20, 2009

Nassim Taleb and the Black Swan Cameron

On Tuesday I went to a breakfast seminar at the Royal Society Arts to hear Nassim Taleb (left) speak for the first time recently in London about the current worldwide economic crisis. He was here 30 months ago when he ridiculed by some for his predictions of a pending financial meltdown. Now of course he is the “hero of the hour” (as was Shiller).

Nassim is “Mr Interesting” personified. Check out his website “fooledbyrandomness”. He has a very high opinion of himself and a somewhat lesser opinion of those who don’t totally agree with this former opinion.

The panel comprised of Nassim, chair Danny Finkelstein from the FT and David Cameron - Conservative Party leader (check out Tuesdays post).

Nassim was very good value – provoking, entertaining and very personable - who spoke without any notes. His most famous work is “The Black Swan” which he explains is about “high-impact but low probability events”. Wikipedia explains further:-

The term Black Swan comes from the 17th century European assumption that 'All swans are white'. In that context, a black swan was a symbol for something that was impossible or could not exist... The main idea in Taleb's book is not to attempt to predict Black Swan events, but to build robustness to the negative ones, while being able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan events and are exposed to losses beyond that predicted by their defective models.

Nassim described himself as being in the “preventive business not emergency care” so he was uncharacteristically uncertain about what do next in the UK. He did convincingly argue that the big banks and financial institutions that are “too big to fail” must be broken up or they will just eventually repeat the same mistakes since they know that the authorities will not allow them to go bust. Check out similar argument here.

He also suggested that there is too much specialisation in financial services and too much debt. We need more generalist institutions which should have greater levels of deposits and lend less. (Not rocket science then?)

His solution to the current mortgage debt crisis is that Banks should stop sending “hate mail” to those in arrears and instead offer to reduce repayments in exchange for equity in these properties (good idea which is starting to happen in the UK). If there is cancer in the housing sector you don’t just offer pain killers.

Nassim actually likes economic crashes – he thinks they are good thing but they should not be big enough to be able to threaten the entire economic system as has recently happened.

He is very skeptical of “regulation” - he pointed out that he was a derivatives trader for several years and when he was a trader, give him a regulation, he would just find a way around it.

Regulations only benefit regulators and lawyers (workers capital argument?).

The bonus system in Banks definitely needs reforming. If Bankers are fooled by the randomness and give loans to black swans then they should not get any bonuses. (But who and how will they enforce this?)

I thought that Nassim ideas were really interesting. I was not able (despite trying) to ask my usual question to Nassim and Cameron about the role in the economic crisis that poor governance of workers capital played. Which is a pity - but there you go.

On the night before I read about Nassim’s proud boast that he always replies to short emails from people so I emailed him the question “Did Gordon Brown save the World”. He didn’t respond to this but to be fair he did actually email back and ask “Are you john Gray the author, my friend, or another one? “ I responded that “we are all Spartacus” but I was in fact “another one” to which he did not reply.

I suppose I hope he meant the highly regarded philosopher John Gray as a mate rather than the “Mars and Venus” John Gray. But somehow I have my doubts.


Charlie Marks said...

I suppose he's right about regulation - if your motive is to maximise profits, then it can be tempting to avoid obeying the spirit of the law, and sometimes even break the law.

Changing ownership structures to give workers representation - something like Hutton's stakeholder model - would certainly provide another perspective for UK financial institutions. The risks taken by building societies appear to have been less than those of private banks, suggesting that maximising shareholder value is a factor in crashes.

Btw, there was a report on this meeting in the FT which suggested Cameron was not at ease with Talebs scattergun approach and controversial statements. Care to confirm?

John Gray said...

Hi Charlie

Apologies for not replying sooner. It is imperative that ownership structures are changed. Regulation is just a game to these "swinging D**ks" (I used the word in its true British sense)- holding more deposits will not work either since they fiddled things last time and will do so again.

Workers representation - Capital Stewardship - will not be perfect but will the difference. It's our money.

I did feel that Cameron was, let us say, "ill at ease" with Talebs. Who was very entertaining since you could not be sure what he would come out with next.