Taleb Tells Us How To Fix What Broke

[haha]

FT.com / Comment / Opinion - Ten principles for a Black Swan-proof world

 

[Gone4Good]

So ban corporations from getting too large (1), ban complex financial products (5), ban derivatives (6), ban leverage buyouts (10), fire all of the financial professionals and economists and replace them with ?? (3), and somehow find a way to finance retirement without financial assets (9).

Sounds reasonable. And achievable, too.

 

[TooFrugal]

Great article. I agree with everything Taleb says. He is my hero.

and somehow find a way to finance retirement without financial assets

I think he means without risky financial assets. After the past decade and especially the past year, for retirement planning I've personally been less interested in equities and more interested in investments in TIPS and annuities and books like Zvi Bodie's, Worry Free Investing.

 

[Grep]

Wow, I had a very different take on the article, unless we're collectively being sarcastic. It seemed to me that half of what he proposed is impossible, and the other half will never happen, at least not definitively.

But then, I'm so sick of black swan this, black swan that. He's had his 15 minutes of fame, already.

 

[dex]

Wow, I had a very different take on the article, unless we're collectively being sarcastic.

I don't get it either unless they don't understand the article.

The article is repeating some basic economic advise. Instead of the Black Swan context it could have been capitalism 101.

 

[REWahoo]

He missed the most obvious requirement: Ban all investments except those which increase in value.

 

[Independent]

I agree that we need some regulatory changes, and I'm afraid we're going to go back to business as usual, but his list is too long.

Here's my list: If you are doing banking (i.e. borrowing so that you can lend, assuming credit and liquidity risk) you need to be regulated like a bank. Regulation involves significant capital requirements (keep leverage down). Keep banks separate from other financial institutions.

I can think of a few details on capital: Don't let capital requirements shrink when securities are pooled. Capital ratios get larger when firms get larger. Capital requirements are higher on loans to other banks.

Generally, our attitude should be that economy doesn't need "financial innovation" to prosper. We want innovation in the real economy (glass fiber is better than copper wire). But the financial sector is already pretty efficient, we don't need to take risks to gain a few basis points. So it's not a great loss if we happen to guess a little high on the capital requirements for some new financial product.

 

[Gone4Good]

I think he means without risky financial assets. After the past decade and especially the past year, for retirement planning I've personally been less interested in equities and more interested in investments in TIPS and annuities and books like Zvi Bodie's, Worry Free Investing.

Maybe, but he didn't say. My strong suspicion is that he doesn't even know. My further suspicion is that he simply needed another bullet point to round out a "Top 10" list and figured it would pass for wisdom to everyone who reads the article quickly.

As far as managing retirement without "risky assets" I don't think it's possible in the aggregate. TIPS aren't risk free. They have huge interest rate risk, reinvestment risk, inflation risk due to taxation, and even some default risk. Besides, the $515B in outstanding TIPS bonds are a very small fraction of what is needed to finance the retirement goals of the U.S. population.

The other way one might achieve a retirement system that doesn't rely on "risky assets" is a massive Federal pension system . . . Social Security on steroids. But given politicians propensity to over promise benefits, and the requirement that the plan be unfunded (so as to not rely on risky assets) I hardly see how such a plan would contribute to greater financial stability. In all likelihood, it would result in the opposite.

 

[audreyh1]

Generally, our attitude should be that economy doesn't need "financial innovation" to prosper. We want innovation in the real economy (glass fiber is better than copper wire). But the financial sector is already pretty efficient, we don't need to take risks to gain a few basis points. So it's not a great loss if we happen to guess a little high on the capital requirements for some new financial product.

Wow - that is a fascinating insight Independent.

Audrey

 

[samclem]

And how about this simple idea: If an institution writes a mortgage, they have to keep it.

And how about some type of reform of the bond rating agencies--something stinks there, alright.

 

[DAYDREAMER]

And how about this simple idea: If an institution writes a mortgage, they have to keep it.

quote]
I don't think Mortgage Back Securities will be a very marketable thing in the future. I think the banks/Wallstreet stunk those up pretty well. The only agency willing to buy stinky mortgage securities is the US Government. Oh wait, that is you and me