Nassim Nicholas Taleb detailed 10 principles for a Black Swan World in the Financial Times earlier this week. At the core of this crises was the ability of a privileged few to take huge risks with other people’s money. Safe in the knowledge that while they could keep any profits they made, others would bear the brunt of any losses. The size of the risks they took made them too big to fail. In Ireland, the National Assets Management Agency is in the process of lumbering the Irish taxpayer with the debts of delinquent bankers, property developers and speculators. Privatising profits and socialising loses is simply not capitalism, it’s bad economics and even worse morality. Creative destruction, the mechanism that allows the good to drive out the bad – improving living standards for all, is essential to capitalism without it all we are left with is a corrupted and debased economic system that protects the rich at the expense of the poor. Taleb has often argued that, due to evolutionary biology / psychology, humans are largely unable to comprehend the scale of the risks we face in today’s modern hyper-connected highly leveraged world (extremistan).
10 principles for a Black Swan world
1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks and hence the most fragile become the biggest.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
Hat Tip The Property Pin