Opinion

James Saft

Save capitalism from the banks – Nassim Taleb

January 30, 2009

Black Swan

Nassim Nicholas Taleb,  the author of  “The Black Swan: The Impact of the Highly Improbable”, has a simple proposal to as he puts it, “save capitalism and free markets from the banks.”

Nationalise the banks, limit the rewards to those who work in what he calls the “utility” part of the system and have a completely uninsured second leg that can take all the risks it wants and lose its shirt, he said in an interview in Davos at the World Economic Forum.

“They rigged the game. We pay them for their profits, there is no clawback so their incentive is to hide the risk they are taking.”

“Which is why eventually as someone who loves free markets,  a total nationalisation of the part of the business that requires insurance and does clearing and payments needs to happen.”

“I am angry with U.S. policy. What we had is exactly the opposite of socialism, they got TARP to pay their bonuses and to take more risk.”

He describes his plan as Capitalism 2.0. It would have a barbell structure, with the insured utility-like part on one end and the free market bit with privatized risk on the other.

He describes banking bonuses as asymmetric because the banker gets the upside but does not share in the liability which ultimately may be funded by taxpayers, as we have seen.

Taleb, who as you may have noticed doesn’t mince words, is no fan of private equity.

“Private equity has absolutely no reason to exist. The private equity holder has all the upside and the banks all the downside.” He’d have no objection to a system where private equity funds itself via hedge funds, so long as neither party had any recourse to government insurance.

And a bit like an Old Testament prophet, Taleb is angry and wants those he thinks are responsible to suffer.

“I want them poor and they deserve to be poor.You can’t have capitalism without punishment.”

Oh, and another thing, he wants Bob Rubin, who trousered millions while chairman of Citigroup, to cough up.

“I want Bob Rubin to return his $110 million dollars to the American taxpayer.”

James Saft is a Reuters columnist. The opinions expressed are his own.

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Comments
91 comments so far | RSS Comments RSS

I agree with Mr. Taleb. Banks should be held responsible. Our future generations will shoulder this burden, so why shouldn’t the executives, their families, and future generations as well.

Posted by Wayward Ones | Report as abusive
 

Let’s not forget Moody and the investment rating services for their part in watching as cow dung was wrapped in Christmas paper and given a triple a rating. Congress played its part by monkeying with the insurance laws so that these investment vehicles could appear to be insured to investors. This is the biggest and most coordinated scam I’ve seen in my 63 years, and we would have to clear out a lot of prisons to make room for everyone involved in the fraud. Let’s just bring back the guillotine.

 

Off all the ideas I have seen floated around this looks like the best of them. A duel system as he proposes looks like it would do well to protect capitalism from society while protecting ppl like myself from Risk taking money types who have no problem leaving me to foot there failed bill.

Posted by eron | Report as abusive
 

I agree completely with your opinion about the banks.
All the economic and financial troubles of the last 1000 years or so, have been induced by the bankers and their banks!! Please check the banking-troubles of the USA for the last 100 years and you will see what I mean.
They are always greedy and always the first to deny guilt.
Ofcourse they mis-use the systems-in-place at any time, because anybody is their Friend when They need money for themselves.
It is not perse criminal but just greed-inducing opportunities. And bankers are the first to grab those. They are at the source of the Oils what greases the economies, but also the pockets of their main customers, the bankers themselves.
Have you ever met a poor Banker?

Putting the Bankers in a Straight Jackett or tight government control, will solve these problems.

louis.

Posted by Louis Schwaanhuyser | Report as abusive
 

This has been happening for thousands of years.
The Bible the Magna Carta and various other historical documents show mans attempts to control the banks.
The French even tried chopping off their heads but sadly nothing has worked.
The US itself was created because the English King wanted to tax the colonies so he could pay off the banks.
Whatever system is devised there will always be those who will manipulate it.

Posted by Allan Jeffreys | Report as abusive
 

The whole banking /regulatory debacle may be summed up as “The difference between Genius and Stupidity is that Genius has limits.”

Posted by mervyn gidman | Report as abusive
 

totaly agree with his comments. Why should they get the rewards of the “risk taking” of there buisiness when the people pay for there mistakes. After that the people has to pay once more threw there mortgages and every other service fee they pay.

This is absurd and totaly contrary to the basic capitalism ideals.

 

There are countless people here in the US who are upset with the greedy crocodile capitalists on Wall Street and in the large financial institutions. In lieu of the death penalty (I favor the guilotine) a few years in the nick might set an example ‘pour encourager les autres’. ‘Beat them until they bleed and then beat them for bleeding’. We will have to build new prisons to house these miscreants. Wall Street has been a rigged game for years. Naked short selling, dishonest accounting firms, criminal collusion between brokerage houses and Bernie Madoff (50 billion dollars stolen – a new world’s record!) We live and learn.

Posted by Robespierre XIV | Report as abusive
 

“Problems cannot be solved by those who created them.” – Albert Einstein

It is good, very good, that outside wisdom, such as Dr Taleb, is now coming forward. Keep it up Dr Taleb. (By the way I am on my way finished your book The Black Swan.)

What the world DO NOT are more of those G7, G20, Davos and what’s not economic gatherings. These people has far too much self-interests to find credible solutions.

What is world need is more outside wisdom to propose visions, ideas, strategies for a next financial architecture – an architecture the works for the interests of the public.

Indeed the American mafia has not died with the death of Gotti after all. It has infiltrated deep into Wall Street, and turned banking into a racket. Send in the FBI to bust this cancer up for good.

Posted by TomK | Report as abusive
 

Nobody was complaining when the system was working…knowing the system was not good…Honesty is a good skill

Posted by blablabla | Report as abusive
 

While we wish to blame the bankers and various other crooks involved, from DC to the local elected that wasted money, did “special favors” etc… it might be time to examine those in the mirror. I can find VERY few in the financial “experts” of media or government that 24 months back would not have pillared any bank or WS firm for NOT making a good ROI, not meeting “analyst’s forecasts”, not Keeping up with others and rewarding their “brilliant C//’s” with huge bonus’s they earned as stock, ROI, etc hit record numbers. I cannot think of one money media mag, paper etc that did not kneel in worshipful adoration of the “great management teams” or C//’s that now have proven to be no more then incompetents and most likely corrupted. I do challange that latter a bit as wonder if any had brains enough to actually make money, or were simply caught up in the financial currents..
I can well remember so VERY MANY that howled in joy on the “Look at the ROI I am getting here, the house(s) I bought there with little of no down, etc etc”.. and they were made into media stars as only “warning” ever issued was “Get into the house and markets as they are going // percent up every day, be done with SS and let the funds go to the Market, let the employees invest for own futures as look what they are earning now etc”. There seemed to be ads everywhere on “ZERO DOWN, 1-3% APR, ARM’s start at 2%, interest only, get into stocks now, forget that stooges USA bonds, etc”. Yet NO ONE seems now to KNOW that ARM’s were going from 3% to 10% and all else.. NO ONE SAID A WORD..other then “Buy it today and flip it in six months, you can get a $400K home for $350 month etc”. I REPEAT NO ONE, Political, regulator, C//’s, auditors, economists, Bankers or WS, or any of the corrupted or terribly incompetents listed..or a combo of both. NO ONE SAID A WORD OF WARNING other the “Get in now as can only go up”
The NATION did just that as they were and are generally a “I want mine now as I deserve it” and most simply to uneducated by the failed USA “Let all pass as to fail hurts their delicate egos” systems to even compute compound interests. I am not just referring to HS, where fully 1/3 drop out, but to what has become for most a extended HS four year spree called “College”. Few took the tough hi tech, sci, eng etc, for two reasons, one it requires work, two they are not smart enough. and perhaps at third.. saw where a laid off WA MU kid started at 100K/year at age 26, now laid off.. so one might suggest to much paid to many for to little in the real knowledgeable contributions dept..
So now we pay, the party is over, and it seems China now “suffering” as their growth down to 7 or 8%. But China will be the new power, the west, the USA in particular no longer has the chutzpah, technically trained to be competitive in ANY area, nor the toughness or education we once had to compete at world levels. Note the “golden age” of USA was mostly created by the highest educated ever, those from WW2 on GI BILL.. So let’s not blame the bankers alone. We let the pols loose and as long as “paper not products” have value.. the party went on.
So now we pay for the seeds that were planted 40-50 years back. Then we taught the young, now 40-50, their parents that dodged the NAM and any other “service to the nation is a citizens duty for a couple of years”, instead taught “you can beat the systems as it is only for suckers” and that is what happened.. from the mortgage buyer to the WS, Political and Bankers,, they knew they could beat the systems.. and the citizens whom really do not have a clue about real “Capitalism” went along.. as the guy “Abner” said.. “we have met the enemy and they are us”.. and now it seems we captured ourselves?

Posted by chuck | Report as abusive
 

This is nothing new. Proposals to have one banking system that offers insured deposits with limited returns and a second system with unlimited returns and uninsured deposits are nothing new.

Posted by Ed Ryan | Report as abusive
 

The IMF just voted Canada as having the most secure banking system in the world. How come our neighbors to the North are ok and we are not? Simple – politicians and the law. To get a mortgage in Canada you must prove income with your tax filings. You must have 10% down. There are no 40 year mortgages. If we had the same laws in the USA instead of politicians pushing banks with “anything goes”, we wouldnt have this crisis. To re-capitalize their banks, the government of Canada is giving tax free savings of $5,000 a year to all citizens instead of wasting billions of tax payer money. Last – if you think government is more honest or efficient than free enterprise in running the financial industry you are dreaming. Theres a lot we can learn from Canada.

Posted by tourist | Report as abusive
 

The Govt still wants to repeat the same mistakes by applying the same bandage i.e. write off loans, rescue banks and lend subprime. Infact the Govt wants to make it a precondition on the banks to lend (presumably subprime)when there is no business case to lend.

Posted by C Varghese | Report as abusive
 

The only way to fix the problem is to convert to Socialism. By dismantling Communism in the Soviet Union Gorbachev laid the groundwork for the collapse of Capitalism. Socialism may not work in a poor and underdevelpoed societies but once you reach the apex of Capitalistic Greed and collapse the best move is to Socialism. It resolves the entire financial imbalance in one fell swoop by redistributing the wealth to the people and guarantees need will be met. Now we have the 5% Ruling Class that control 50% of wealth. Everyone else gets the scraps and is left with a dog eat dog mentality. There has been no progress in mankind’s evolution after thousands of years. The only people who lose out are the Ruling Class. Too bad the masses are brainwashed into protecteing the Ruling Class who have you brainwashe into thinking Socialism is a dirty word. Dog eat dog is Ruling Claases Manifesto, not Freedom. Mankind is enslaved by the Ruling Class and its proganda machine. Take the assets away from the ruling miscreants. They have robbed us with their insatiable greed. Even now they live in luxury while the people have pay for their mistakes and have less and less. The Ruling Class have power over the mass psyche. Get over the dirty word, “Socialism” because it is enslaving you.

Posted by RJAY | Report as abusive
 

Let’s face it, America has been looted, the UK also, but then again it was in on the scam. The crime of the century has been committed and the perpetrators will not be punished because the whole scenario has been essentially corrupted. To me it appears that a certain ‘mafia’ exists, all peeing in the same pot, scratching each other’s backs, all delivering their lines and ensuring that everything more or less has gone according to plan, check the contemporary history, go figure.
Thank you.

Posted by Leah | Report as abusive
 

We will achieve very little nationalising the banks. We need to go back to simple vanilla banking with low gearing. The politicians and regulators were asleep at the wheel. If you want to blame anyone blame them. They are accountable to the public and it was over to them to regulate the markets.

Remember most people did not see this coming not just the bankers. Everyone needs to stand up and take responsibility for their actions. We live in an interconected world and we all need to focus on sorting this out before it implodes.

I predicted this global recession in 2007 at a time when hardly anyone saw it for what it was. Most people have been and still are behind the curve on this. We need to focus on practical solotions with some urgency. I have little confidence in what i have seen to date.

Evan George Soros said at Davos he did not apreciate the scale of this problem. Forget the blame game for now and get on and focus on practical solutions to solve this huge global problem.

Jonathan Urlich

Posted by JONATHAN URLICH | Report as abusive
 

There is too much personal investment in the system to do as Taleb suggests – he is absolutely right on the nail. No need for polishing his words they need to be raw and immediate. The plea that those who have robbed the taxpayer they they have not broken the law shows that they are as morally bankrupt as the organisations they have led. We want to believe in them though, we want to believe that justice will win the day. Sad really.

Posted by Simon | Report as abusive
 

it’s common sense, but bankers wages depends on them not believing it (apologies to Emerson).

Posted by ray | Report as abusive
 

Good on you Mr. Taleb, It is obvious that the existing financial system can, regularly over at least 100 years,new billionaires at the expense of creating another billion of poor and disfranchised people. Socialism was given less than 70 years before it collapsed,it is time to establish Capitalism II as Mr. Taleb called it by nationalizing the banking system.

Maan
Australia

 

Accountability is the cornerstone of any sustainable civilization.

Egalitarianism is NOT a soft-headed notion: the altruistic/injustice gene enabled our survival within groups. Trust is a prerequisite for any market economy.

Does anyone really believe that social unrest and violence is just for other countries? I would caution President Obama in being perceived to have raised false hope.

A new deal, was it? Ask your friendly CDN steel makers or Mexican NAFTA partners.

Les Stewart
Midhurst, ON, Canada

 

Why is there no mention of the fact that this financial crisis would not have happened if Congressional leaders had not encouraged Fannie Mae and Freddie Mac to not only mainstream subprime mortgages into the secondary market place but to defraut MBS investors with AAA ratings. I believe the fault lies with the policitians who when confronted by the Bush administration in Congressional hearings, refused to intervene.

 

I saw a giant billboard which read, “A good man solves his own problems and becomes a blessing to society.”
Banks hold our checking accounts, our mortgages, our car loans and our credit cards. Now don’t you think that is a little too much control? Saving money that you plan to spend is called disposable income. Saving money that you don’t plan to spend is call WEALTH. Put your wealth in something outside of the banking/insurance industry. Maybe in gold, or art, or your favorite collectible. Our middle-class is now so large; we can change anything simply by moving our money.

 

Hurrah for NNT! Who else is truly standing up for we taxpayers?

Posted by Wendy Anthony | Report as abusive
 

Talking sense again Nicholas.

Posted by Tony Coleby | Report as abusive
 

Remember our 41st president’s call for 1000 pts of light? We need 1000 retired small-bank executives who love our nation to volunteer for less than 500,000 a year to run these banks and clean them up over a period of 2-3 years, and mentor young(er) bankers who’d make less than 500,000 a year on how to run the “utility” Dr. Taleb speaks of. In the meantime, have 10 of these 1000 bankers of light sit with Messrs. Geithner, Volcker, et al and write the rules of the new utilities.

I hope my opinion’s worth about a nickel.

Posted by Ed Block | Report as abusive
 

In banks “we don’t trust”.

Posted by Richard | Report as abusive
 

If you want to talk more about how we can make bankers accountable, Nassim Taleb opened a facebook group http://www.facebook.com/group.php?gid=51 818722129
Let us brainstorm together to make them accountable!

 

Operant conditioning, a nice $110 million in positive reinforcement.

Posted by Michael Kirschvink | Report as abusive
 

Agreed about the bankers.
However: Remember inter alia James Johnson, Franklin Raines, Sen. Dodd & Cong. Frank?
Think they had nothing to do with the collapse?
They are, to coin a phrase, laughing all the way to…
And, given the 7+ decades of FDIC & similar risk-hiding legislation, there aren’t so many bankers alive who really know how to do risk assessment; they’ve never really had to learn, or had their own skin in the game.
Good luck to us…

Posted by Michael David Rubin | Report as abusive
 

Fat chance that Nissim will get his wish. The stupid Americans deserve what they get. The Bankers have robbed the public of their present and now they are taking their future. The American public should all be placed in financial slavery. They no longer deserve their REPUBLIC. How stupid and how dumb are the Americans. They are absolutely lazy and fail to read meaningful books.

The Treasury and the Federal has already turned over 3 trillion dollars to the Bankers. And now they are on the verge of giving away another trillion.

Fat chance the Bankers are going to do any suffering.

posted by Yonni Bar Davi

 

‘is not a good keeper also a good thief’? republic-plato.

Posted by kssong | Report as abusive
 

How do we make this happen? Other than just talk??

Posted by dave | Report as abusive
 

I find it insulting in the extreme that players in the financial markets can be excused for rampant greed and irresponsible risk taking. Ever heard of taking personal responsibility. These people have done wrong and must be brought to account. If someone leaves a car parked, unlocked and with the keys in the ignition then they are incredibly stupid, but that should have no bearing on the fact that if someone steals it they are guilty of theft. There are no excuses – you commit crime – do the time.

Posted by Michael | Report as abusive
 

I agree with Taleb, but I have different suggestions.
The problem is not in outrageous bonuses received by people in the companies saved by government. The problem is in the wrong incentives that led to the failure of these companies. The existing system encourages seeking short term gains and risking other people money. If you are not afraid of 10% risk of failure you can raise your return rate by 10%.
Why should they be afraid if the punishment was very mild even in the case of recent failure of cosmic size? The people that created the present situation were not stupid. They cared of their own interests and were very successful in enriching themselves. They remain rich, other people became poorer. Alas, there is a very good chance that the new people in the same positions will do the same, unless the system of executive compensation is changed in such a way that the interests of executives are aligned
with long-term interests of the company.

What can be done to reach this goal? The standard idea is that a large part of the income of executive should consist of stocks and stock options. However, this idea works well only in the case if stocks are held for long time (even if the executive has left the company). Suggestion:
any person participating in decision making (not
only CEO) should receive almost all remuneration in stocks that cannot be sold for at least 15 years. He can borrow against his stocks
with zero interest rate to finance lavish lifestyle or to invest in other companies. However,
if the price of his share fell below the amount he borrowed he should return ( a part of) his debt (and if he borrows very significant amount he should present a proof that he is able to pay his debt at the time of borrowing ).
The bankruptcy of the company will erase his remuneration almost completely.

Many people think that it would be fair to restrict
outrageous salaries of CEO’s, especially if their companies get the government help. I agree that this would be fair, but I believe that this does not solve any problems. If shareholders think that the high salary is justified there is no reason to restrict it. However, if the temporary success was only a prelude to a failure, the salary was paid for nothing and should be returned. Many banks would not survive the present crisis without government help; with the system I am suggesting their CEO’s would be punished for their wrong decisions.

Posted by abel | Report as abusive
 

Gut!

 

Taleb is confusing things, even in his book ´The Black Swan´ where he gives more than one and even contradictory definitions for said animal (!), apart from making quite a lot of other mistakes. Here, the idea of nationalizing the banks is completely wrong because the problem we actually face is not a question of ownership but one of most competent and efficient control whether regarding nationalized firms (to some extent this is already the case)or not. The sector includes many more players, not just banks. Strict control is also major problem when it comes to rating agencies. To conclude: To avoid further far reaching disasters, efficient and competent supervision is the name of game.

Posted by Hanspeter Bornhauser | Report as abusive
 

Corporate citizenship and career legislators are at the root of the problem. No meaningful change will occur as long as there are vested interests in the system as it is.

Corporations must not be allowed to continue to enjoy citizen status. An individual is a citizen. A corporation is a group of people united under a brand name for the purpose of extracting profit.

There are legislators that have close ties to those families that own those brand names. They have the ability to utilize their considerable financial advantage to steer policy away from securing the public interest. Protection of profit is the primary consideration. The benefit of the people is not. Many legislators cater to these private interests in the name of public good even when there may be better, more practical solutions staring them in the face.

They like their seats in office. And they want to profit as much as they can from those seats. Limit them to reasonably short terms in office so that no vested interest beyond the public good can develop.

It’s just important to see things for what they are. If we decide we can live with things they way they are, then we will leave it for our children as a gift to them. If we decide things need to change for the better, then we leave that as our gift instead.

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