Save capitalism from the banks – Nassim Taleb
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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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Totally agree,
simple and effective
Thank you James Saft and Nassim Taleb for your views, but I rather doubt that the US is going to nationalize the banks.
Instead I believe that the issue of massive regulatory failure needs to be addressed much more explicitly. I am a former bank regulator (a Director of Research of the New York State Banking Dept.) and I have spent many years in the investment banking world involved in risk management, risk reporting and risk technology. Lately there have been several proposals for revising the regulatory process, including establishing a clearing house for credit-default swaps. consolidating regulators, new reporting requirements, etc. But there seems to be a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. If I may let me offer the following comments:
1. The bank regulators have had the authority to examine any aspect of a bank’s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper will mean nothing if the regulators cannot or will not do their jobs.
2. Mr. Timothy Geithner recently said “First, the multitude of overlapping regulators must be rationalized into a coherent few, the communication between them improved and their turf battles ended”. Unfortunately consolidating the regulators will produce some streamlining but will not likely achieve the desired goals. Sending a regulator who makes $50,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did for over 4 1/2 years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There is a lot of deadwood at the top of the agencies and it needs to be cleaned out. A Herculean task if there ever was one.
I AGREE WITH EVERYTHING YOU HAVE SAID. WE HAVE A GENERATION OF 40 TO 50 SOMETHINGS WHO HAVE NOT BEEN TAUGHT TO TAKE RESPONSIBILITY FOR THEIR ACTIONS, THEIR PROBLEMS AND MAINLY THE RESULT. SOMETHING OR SOMEONE ELSE HAS TO PICK UP THE PIECES, PAY THE PRICE OR TAKE THE BLAME. I KNEW IT WAS COMING. WAIT TILL THE NEXT GENERATION TAKES OVER IF THEY CAN EVEN COMMUNICATE.
Taleb has it right and he used a good forum to address the issues. Now Washington needs to pay attention.
GREAT MESSAGE. Needs a little polishing and some tweeking, but good on the risk division. Changing them to a utility like clearing house still needs capital and managers. We can not afford another Postal Service type entity
Good thoughts
Absolute right on the nail!! And not only Bob Rubin but each and every one of the bankers who have got us into this mess should be made to pay back all the bonuses they received whilst doing so.
Right on! All those thieves should be forced to give back the money they earned under false pretenses. THEY should be funding the bank bailouts, not the taxpayer, since it’s their inepitude and hubris that led to this financial crisis.
Sounds fair to me.
i agree with Mr Saft..down the rabbit hole with these crafty bankers and wall street moguls..they knew the world was getting sold out..and they laughed bec they wld profit from the chaos..and HAVE..good, put these smoothies into a min sec jail until they pay back their ill gotten gain..some 1 steals a bottle of wine and gets caught and is in jail for 30 days..these moguls stole millions., and walk free ev day and all laugh abt it..while vacationing on their yachts in the Bahamas..spineless gov`ts..will do 0 abt this except posture and rant..thats all we get as a solution..the solution is 0 solution..the taxpayers will get screwed here..just wait and c..
Taleb for US Treasury Sec.
’nuff said
Even worse, it’s not only todays tax payer, but future generations tax payers are asked to pick up part of the mess. I am already sorry for my childrens tax rate, today.
It may be unthinkable today, but what if at some point markets loose faith even in government debt? Will investors ask for covenants or collateral, say in terms of territory, in government bonds?
Taleb tells it like it is..
As an Australian I waiting for the real problems to start here. You think the US had a housing bubble, ours is huge, prices in some areas have tripled in 5 years. To give you an example Adelaide pop 1million with average annual income of $55,000 median house prices are $450,000. Yep thats 9ish times annual income, our historical average is 5ish times annual income.
I wish I could get Taleb to comment on Australias looming crisis. It may stop our elected officials claiming there is no bubble here.
You had Alan Greenspan, we have Wayne Swan “there is no housing bubble in Australia”. Whats even worse our government is encouraging first home owners into this market at its peak by using a $25,000 first home owners gift using tax payers money. I have a feeling our government is priming our own sub prime crisis.
I echo pretty much what everyone else is feeling about the current state of the economy, dishonest banks & bankers, wall street and the crooked CEO’s who run it, along with the extortion (bonus’s & salary’s) money they take from it. Funny thing, the bank CEO’s were allowed to squander billions. I for one as a tax payer,would pay several million more to see some of these crooks prosecuted. Food for thought…I wonder if there is even one bank president anywhere,that would allow one of their tellers to hand out money on a daily basis without any accountability what so ever, I think not. I’m one of the people who has always believed that to much government involvement, oversight, meddling, etc, is not a good thing. But in the case of banking and wall street communities, it is desperately needed.
Exactly! The only reason these bankers take such ridiculous risks with our money is that they know they stand to make obscene profits in the form of bonuses which they can never lose. Most of us know that if we gamble we stand to lose everything. Why shouldn’t they be made to repay not only their bonuses, but some of their previous “wins” instead of asking us to foot the bill for their stupidity and GREED!
Please continue. This is a solution.
As a child, I was taught Banks have the privilege to have “Bank” in their name and on their building with the promise that they will only take deposits and loan prudently while paying interest on deposits.
I am in favor of ending the US Fed. Why do taxpayers pay interest on money the US Fed creates? Study history. By fractional reserve (think of a $1 deposit lent out 10X, only the US Fed gets to create the $1 too!).
Most banks received and lent money prudently. They may survive.
Imprudent banks (big or otherwise) fail. Let them fail. No gain = No bonus.
I strongly agree with Saft’s report and most of the great comments to date. Thank you folks. We can return to our constitutional roots.
Further to my comments here in Australia.
As the international market for MBS (mortgage backed securities) has effectively shut. Who has become the only buyer with $4 billion committed so far, you guessed it the Australian government (tax payer).
We desparately need some comments from respected international economists on the state of Australias housing market. Currently there is only one lone voice of Prof. Steve Keen from the UNSW. In the wider community the belief of its “as safe as houses” is alive and well. A recent survey of Australians showed 70% believe house prices will rise this year even though our economy is going to fall into recession.
Please Reuters can you help provide an expert opinion from someone like Taleb.
Excellent starting point for fundamental change. Throughout the various banking scandals of the past 25 years banks have proven that they are not to trusted and an altrnative to the structure of banks we now have is required. This is scheme certainly worth consideration. Afetrall, what we now have isn’t working.
He is absolutely right, but it’s too late to fix it, sorry. Democracy is morally bankrupt and now there is no way to restore that trust.
In the end, the banks won. They have proved, once and for all, that men cannot govern itself – just look at this result.
I agree 100%! But this won´t ever happen becouse the private bankers(FED)have the final say in US politics.FED can simply print it´s own money to pribe politicians. How much money can you print?
They will never let us move to system that deprives them of control and profits.
“Exactly! The only reason these bankers take such ridiculous risks with our money is that they know they stand to make obscene profits in the form of bonuses which they can never lose. Most of us know that if we gamble we stand to lose everything. Why shouldn’t they be made to repay not only their bonuses, but some of their previous “wins” instead of asking us to foot the bill for their stupidity and GREED!”
Excellent point! Bravo!
Bravo! But I would not call his suggestion “Capitalism 2.0″ I would call it “Capitalism 101″! What we’ve been witnessing hasn’t been “Capitalism” at all, but a form of socialized welfare for the banks.
Mr Taleb’s anger at the bankers is misdirected — they acted in their self interest, just as anyone else in their position would have, and took advantage of what was made available to them. Blame Congress and regulators.
His suggestion to split the low risk banking business from the higher risk investing/speculating business is not new at all — it is precisely the conclusion reached and acted upon by Congress in 1933 when Glass Steagall was enacted.
The universal banks were split into two — insured banks that had the exclusive monopoly of taking other people’s money (deposits) and were restricted by law to making plain vanilla low risk/low return loans, and investment banks that were privately held partnerships left to gamble their own capital any way they wished (and guess what, when it was their own capital the gambles were a lot more conservative.
Starting in the 1980s and culminating in 1999 when Congress enacted Gramm Leach Bliley Act (which was necessary to allow the merger of Travelers and Citibank to form Citigroup)repealing Glass Steagall, the banks were allowed to play like investment banks and the investment banks became public and also played like banks.
Less than a decade after Congress undid the complex balancing that had worked relatively well for 60 years we find ourselves in exactly the same position we were in 1933– and Mr Taleb’s suggestion brings us full circle again.
Great to see someone from Arabian and Greek roots,such as Taleb, come to surface with such insight. I hope he keeps getting heard loud and clear and in time we all have a chance to witness ideas get implemented.
The old days of the thieves in Wall Street, gloating over years and years of profits (robberies), has to come to an end. It’s shocking how we’re watching some of these CEO’s still in office, still sucking in bonuses.
The world has to take a strict hard stance and eliminate such irresponsible people and hold all future ones accountable from the get-go.
I agree and I used to work at one of the problem i-banks. From this experience, I can say the people who work in these places are the most money grubbing people on the planet with zero regard for anything but their paycheck. They should be bought to task for the calamity they have created.
Everyone is angry, and everyone wants those they think responsible to suffer.
There’s just one small problem: no two people can agree on who IS responsible!
But in the meantime… have you noticed how the equity markets, where these greedy bankers invest their nest eggs, have fallen by about twice as much as have the housing market where their victims invest theirs (at least here in the UK)? Isn’t the punishment already happening?
What a bunch of whiny babies. . . if you don’t want to subsidize profits or prop up banks with taxpayer dollars, then don’t. It is as simple as that. Let the market correct on their own.
Banks act in their own self interest. If they know they will be bailed out via monetary easing or some other method, they shouldn’t be blamed for additional risk taking.
It is the politicians who gave them the incentive to act irresponsibly. It is the policy that is irresponsible.
President Obama, please listen to Nassim Nicholas Taleb: “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 shir”
President Obama, what you are doing now with the TARP, giving money to the banks, is worst than nationalization. Please punish the banks. Listen to Nassim and not to all those Rubin cronies in your economic team.
President Obama, nothing in your economic policies can be considered as BOLD. And you had promised BOLD changes??? Where are the bold changes?
Sounds interesting. However the author fails to explain where the ultimate risk takers will get their funding to make the risky investments. If they are going to attract funds from individuals, then they will be competing with the “Banking Utilities”. To compete they will have to offer much higher rates on uninsured funds. I can see the prospectus’ now. Just try to read one and determine that you are about to lose your life savings!
Imagine I lend you $1, backed by $1 good, and I ask $1 million of interests in return. I would be printing money, fake money, ghost inexistent money. Today’s crisis come after people discovered they owned fake money produced by the private US banks.
Leaving private banks to exist is to privatize monetary policy. Today we know how privatized monetary policy works.
If private banks continue to exist, you leave a door open for the next crisis. Banks add value to money itself with interests, which is like printing a bill, backed on bills they have, not added value backed by goods. Colombian bill fakers are “criminals”. Instead, private bankers are “capitalists”. Both print money backed by existing money.
Nationalized banks would collect interests that would become government spending, so such newly printed interest money would be backed by the goods government would buy with that money.
Read and learn about how monetary system works.
http://www.relfe.com/plus_5_.html
As a retired banker I have watched the excesses of the banking industry with disgust for more than 10 years. Vanilla banking is a simple business which has been grossly distorted by a multitude of scoundrels who no longer understand the basics.
The proposal put forward by Taleb probably needs some refinement to make it work in a globalised world, but it is certainly the way forward to make sure that we do not see a repeat of 1930 and 2008.
When are we going to demand that the perps of this massive criminal enterprise be jailed and their property and assets confiscated by the USG to repair some of the damage they caused? Jail time and restitution has to be part of any solution/bailout. It’s called “Accountability”. Chris Dodd and Angelo Mozillo would make great cell mates…
Here is an alternative approach. Don’t nationalize the banks. Bail out the debtors instead of the lenders. Take over the loans at a discount from the banks so that they get them off their books. Make the banks pay a restitution tax for however long it takes to pay back the taxpayer. Make an example of the most egregious conflict of interest cases (remember the quaint concept of fiduciary responsibility? That’s the only law we need.)
Although it is true that Glass-Steagal addressed a real problem (the danger of greed, conflict of interest and financial instability), it is also true that governments are notoriously bad at running things, especially when they create huge opportunities for bureaucratic fiefdoms which are also corrupted by conflicts of interest and runaway public finances.
There has to be a middle way. That middle way is founded on incentives and disincentives. Unfortunately the current system has eliminated most disincentives for self-serving corruption. That’s what we still have now and that is why the system is still collapsing.
We need to bring those who have enriched themselves by conflict of interest (malfeasance) to courts and prison where warranted. They certainly need to have their ill-gotten gains confiscated.
Nothing wrong with greed (properly channeled and monitored), it’s needed for innovation– how else to keep those guys glued to their desks seven days a week trying to come up with new and better ways to use our money to make themselves money.
However, it should have been regulators’ job to make sure that they only got paid when they came up with ideas and products that had some real value, like loans and deals that got repaid. Think of entreprenours, inventors, etc — they toil to make it rich, and if they succeed they deserve to make it, if not, they don’t.
That’s where regulators fell short — they allowed bankers to reap ridiculous phantom profits that were based on pure speculative and reckless gambles that had no real value, but did produce short term revenues that met incentive bonus plan targets (not suprising since they created them).
Restructure the incentives so that bankers toil to produce what we want them to — efficient allocation of credit– and demand that regulators monitor and verify.
If they do that, they will see that it’s a lot harder to make the huge margins and profits, and likewise the huge bonuses. Maybe a lot of those bankers will decide to chase the big bucks elsewhere, so long as it’s not using other people’s money.
Mr. Taleb has it right.
At this point, I totally agree with Mr. Taleb…It seems like a very good idea, or at least a start, unfortunately when these banks and corporations are receiving billions of dollars in Federal Aid and are doling out bonuses to their brokers, executives and management without thinking that the public and the government will start asking questions about where the money is actually going, is pretty preposterous. This economic crisis, in the U.S., is probably the most complex financial crisis in the world so far but there are good solutions out there. I think the housing sector has to be addressed immediately and credit needs to start flowing again to small businesses immediately and we need to spur job growth at all levels if we are going to dig ourselves out of this hole. We have lots of problems that need to be addressed, but all in all I think once we pull out of this recession we will all have learned a very valuable lesson from this crisis.
The banks, that have received federal injections, aren’t lending to the public, raising interest rates on consumer credit cards, because they have taken on too much risk in the housing industry and have suffered huge losses, which has collapsed in part due to reckless lending and reckless borrowing by the consumer and the bubble bursting ignorance. All of the toxic loans in the housing industry alone are still not accounted for in those billions and billions of dollars in losses. The banks have drastically increased the guidelines for credit to small business owners and to borrowers, creating a pinch. They have also gone back to very strict guidelines in regards to home purchases and refinances. I think it would be safe to go back to the conservative home loan style before the toxic Option ARM loans and Stated Income, No DOC loans came into being. 90%-95% LTV on home purchases, with full documentation and excellent credit scores…FHA still has some good first time home-buyer loan programs. The stated income loans are a thing of the past. Right now if you live in an area that is full of short sale homes or foreclosures, appraisers don’t have data to show value in a home, your home is only worth what the comparable sales in the last year are showing and if they are not showing value, people are stuck, but they did take on that risk when they bought their home; I just think no one wanted to think the inevitable could actually happen. So many people are upside down in their mortgages not because of reckless spending but because of others reckless spending, the burst of the bubble and the job losses across the board.
We have gotten ourselves into a bit of a problem, because now consumers are not spending because of the amount of job losses and foreclosures in the U.S. on a daily basis, resulting in even more job cuts at all levels. When we don’t spend, how can any company make a profit, unless they are strictly business to business oriented but even then when you’re reliant upon a client that is reliant upon a customer who is not spending, you’re b2b client is not going to spend either, they are going to scale back.
Unfortunately, a lot of people in the U.S. saw their house as a way to create a temporary state of wealth, borrowing up to and over 100% of their home’s value because values were rising at such an astronomical rate and had been for several years straight. When it collapsed they had nowhere to turn too, they didn’t spend conservatively and therefore had no reserves to rely upon when the big house started coming down. We all need to spend, it’s a part of life, but you also have to save at the same time and I don’t think the average American was doing that.
I am writing from India and what these bankers have done have left countless people jobless in our country. We dont even have adequate security net to support them. What your bankers did have pushed just so many to the brink of survival all around the world.
These bankers need to be punished so that all those suffering can have some consolation. For those who say banks should not be nationalised should look at India. In our country the biggest banks are public and they have hardly been affected by the current crisis and they work excellently.
In my personal opinion banks should always be government owned. In America the elite will always shout against nationalisation as it strips them the chance to make money in another such bubble and again leave tens of millions suffering and even your media plays into hands of the rich.
And not only nationalise the bank but fire all the key people as these greedy monsters should not be given another chance to play with our fortunes and moreover their basic attitude can never change. It is also about the wrong kind of people in such a crucial position.
Mr. Obama please do as you have promised the world expects some kind of punishment against these criminals. Either you can pacify the rich like earlier Presidents or you have the guts to take them head on for the future good of people around the world.
Totally agree with Mr taleb – such things should be punished and these bankers put in jail
Well said asterix, a private owned bank can function and profit and not destroy, like it has, but it depends who is running it. They should be put in jail. We need to not fear the greedy elite and take them head on before this happens again, once we get out of this global economic situation we are in.
Why punish the stock holders by nationalizing the banks? If they could come up with a feasible plan there would be more liquidity from more investors coming on board.
I have no idea if anyone will spend the time to read and contemplate this, but oh well it will not be the first or last itme I was my breathe…so to speak. If noone is going to allow competeng currencies, we need to legalise Industrial/Medicenal Cannabis, as an autodetermining force in the relam of human economic, medical, spiritual affairs. Use the UN to remove the International ban so the commodity maybe traded, or continue to betray us. This single commodity can do more than silver or gold coinage, it is sustinance for humanity, and lays the basis for solidairty of the local market place by means of mutualism and barter, but competion is a sin, so whatever.
See you in the camps guys.
The American banking system needs a complete overhaul not only in terms of processes but also in terms of people if we want to avoid any such failure in future. And for those who say others would have behaved similarly should know that madness and greed for money vary from person to person and so does one’s own tolerance to do wrong things for personal benifits.
In US banking system greed became synomous with performance. The more greedy you are the more likely you are to end up in an investment bank. The entire system ran on show off and pretences, to prove that these fools are exclusive in their intelligence and talent. But everything has now proven out to be hollow. Just like empty can makes more noise.
i’ve been saying these things for many many years…as a retired federal agent…we should also have a fixed non taxable interest rate at banks; say 7 or 8%, so that the majority can get a fair deal…then banks would be inundated with money to loan out and the sociopaths(wall street, big banks and our elected officials) will finally be stopped or better, continue gambling with their own money…it’s so obvious that the heretofore mentioned trio of gangsters are all in bed together which is why they constantly screw the public that pays their salaries…for life, including as in the military, free health care…the FED is a private UK entity, charging us to print our own money(4-7) per cent per annum…that’s why they stay in business, courtesy of the above trio and we get currently 1-2% on savings…their actions force us (the public retirement system) to rely on wall street, etc and etal to make a buck…one last comment on being in bed together…the trio, that is…they regularly meet to direct and profit from this cornucopian conspiracy…don’t believe me? do some reading and research……
TONI, you and Mr. Taleb are absolutely right. Those in corporate leadership positions who committed fraud and other unethical acts should be brought to task. The greater problem is how to make amends or mitigate the harm caused to so many Americans. At the same time we must also find the resources necessary (both human and monetary) to educate the next generation so they will be able to rebuild what they have inherited rather than complete it’s destruction.
Oh and by the way, let us not forget to find and remove the clowns in Washington who repealed so much common sense legislation that kept us out of such economic disasters for over 50 years.
Great Idea, Taleb. Now, HOW do we FORCE them to implement it? Here’s my idea. EVERYONE TAKE YOUR MONEY OUT OF BANKS and WALLSTREET NOW! Find a local credit union and put all your money there. AFAIK, credit unions have not been involved in these messes. Calling your representatives in congress has not worked because they are in bed with the banks. VOTE WITH YOUR MONEY. Only when money flows out of these institutions will congress and the banks get the picture. They have shown that they are determined to take us to the slaughter like willing lambs. We need to stop the insanity.
I agree with this author, “capitalism” as an economic system (albeit in various forms) is separate from the “money” system (banking) which facilitates transactions. The current global crisis is not prima facie evidence for the failure of “capitalism,” as much as a failure of the current banking/transaction structure.
During my 23 year career as a bank examiner, I always felt that U.S. bank regulators were the equivalent to British “bobbies” with bicycles and night sticks. Some investment bankers/commerical bankers (a few) were akin to narco-terrorists.
Further, as the percentages of women in upper management increased (starting in the ’90s), the philosophic approach to bank regulation shifted from an attitude of law/regulation enforcement to consulting/nurturing in an effort to achieve compliance.
Despite the belief of many idealists on the Left, in the real world you don’t “nurture” narco-terrorist, or any terrorists.
I feel this point was well made by Iranian president Mahmoud Ahmadinejad last week. In response to Obama’s desire to “talk,” he used the moment to humiliate the U.S. president in front of the Islamic world, noting that “Western ideology has become passive” and the U.S. was weak.
…and yes, I am disappointed in our President’s plans to give out more bail out money. I thought we finally had someone who realized that there is no going back and there is not maintaining the status quo. It didn’t work, things need to change, we need to go forward not backward. Taleb’s idea is perfect. If something is critical to the infrastructure of our country and the well-being of our people, it shouldn’t be left to market forces: Food, military, healthcare, energy, roads and basic communication.
Exactly asterix
The capitalist system has self destructed. Since, ethics, credibility, accountibility and morality were removed from the equation by the politicians and the establishment of big business, you can no longer save the system. The public need to rise and claim their countries back.
I have recently written a blog post on this topic myself – real risk is only going to jail, not keeping their money from past years, and retaining a pension until they die. Without real risks, the same thing will happen again.
My blog post is here – http://markturrell.wordpress.com/2009/02 /02/jail-the-bad-bankers-a-global-movem ent/
Many thanks,
Mark Turrell