Sunday, April 12, 2009
Taleb in Washington
Marion Maneker (MM) wrote a 29 March 2009 piece about Nassim Taleb, link: http://www.thebigmoney.com/print/1660. Yves Smith brought MM's piece to my attention. Thanks. Some quotes, "To Taleb, the supposed stability brought about by complex financial derivatives, global banking connections, and accelerated flows of capital was a mirage masking the accumulation of massive amounts of hidden risk. ... Taleb has a clear-eyed plan. First, he says, we have to unmask the charlatans of risk like Myron Scholes. ... To Taleb, Scholes' academic work, which enabled the widespread use of complex derivatives, was like 'giving children dynamite.' ... We cannot have both debt leverage and a hyper-efficient system--the volatility is too great. What Taleb explains--which no one else does--is that efficiency is already a form of leverage. A highly efficient system removes slack and magnifies small changes. Think of the efficient system as a high performance aircraft. Each minute of steering input creates a rapid and violent shift, of course, speed, or altitude. ... A deleveraged financial system is a stable one, especially if we increase the redundancy within the system. That's an idea Taleb has taken from biology", my emphasis.
I agree with Taleb. Our large banks' capital structures, have too much short-term debt. These capital structures are the financial equivalent of just-in-time inventory. A system prone to breakdowns, see my 23 July 2007 post: http://skepticaltexascpa.blogspot.com/2007/07/just-in-time-inventory.html. As for Myron Scholes, see my 20 April 2008 post: http://skepticaltexascpa.blogspot.com/2008/04/on-black-swans.html. Read MM's piece. I have likened a highly efficient system to an M-16 rifle, an inefficient one, an AK-47. Ah, the simplicity of the Russians. The AK-47 is so crude, it's beautiful. It fires. In: heat, cold, sand, anywhere. It's reliable. Thank you Mikhail Kalashnikov. The AK-47, 75 million copies sold, first choice of terrorists everywhere. The market rules! Taleb even thinks we should "increase redundancy"! Wow. Amen. Redundancy makes for robust systems.