Robert Langreth, writing in Forbes, calls Nassim Nicholas Taleb (The Black Swan) The Oracle of Doom — but not everyone thinks the oracle draws the right conclusions from the realization that markets can be unpredictable;
The critique from Paul Seabright of the Toulouse School of Economics in France: “He is right that economists have put too much faith in their tools, but he doesn’t stop there; he implies that all the tools are useless.” NYU economist Robert Engle says Taleb draws “precisely the wrong lesson” from the meltdown. “This episode has told us we need to work harder and harder on our risk models — not to ignore them entirely.” Texas Tech University statistician Peter Westfall complains that Taleb, while correct about fat tails, is slippery when it gets to mathematical assumptions underlying his theories. “He simply refuses to be pinned down,” says Westfall.
Taleb has been slow to offer up much in the way of advice. My own conclusion was that debt, which tends to be inflexible, was more dangerous than people realized, and that we shouldn’t be subsidizing it with its current tax-advantage. (Interest payments are a deductible expense; dividend payments are not.) It looks like Taleb is now suggesting the same thing — although he makes an analogy I wouldn’t be so quick to make and some policy suggestions that seem unpalatable:
He thinks the world would be a more stable place if there were fewer debt instruments and more equity stakes, perhaps along the lines of the Islamic musharaka system of profit sharing. He thinks complex derivatives such as swaps should be banned because they are tools for hiding massive risk. He envisions a two-tier financial system: Banks that might have to be bailed out someday should be treated like utilities and limited to all but the simplest investing and lending activities. Hedge funds that speculate with private money should do so with the knowledge they will never be bailed out again. Retail investors should keep more money in inflation-indexed bonds and not count on the stock market.
(Hat tip à mon père.)