Tuesday, March 26, 2013

Fragile systems caused by debt not equity

Nicholas Nassim Taleb, author of The Black Swan book.

Debt is fragile; equity can flex.

Book review at Reason.com

A finance professor at New York University and a research scholar at Oxford, Taleb drew wide attention after the 2007 publication of The Black Swan: The Impact of the Highly Improbable, which warned that our institutions and risk models are not designed to account for rare and catastrophic events. Among other things, the book presciently cautioned that oversized and unaccountable banks using flawed investment models could trigger a financial crisis. He also warned that the government-sanctioned housing finance agencies, Fannie Mae and Freddie Mac, were sitting on a “barrel of dynamite.” One year after The Black Swan was published, Taleb’s predictions came to pass.

Taleb doesn’t identify as a libertarian, but he often sounds like one. He supported Ron Paul in the 2012 presidential election and has cited the libertarian economist Friedrich Hayek as an influence. He has called New York Times columnist Thomas Friedman “vile and harmful,” and he coined the phrase “Stiglitz Syndrome” after Nobel Prize–winning economist Joseph Stiglitz, referring to the phenomenon of public intellectuals being held utterly unaccountable for their bad predictions. The economists Paul Krugman and Paul Samuelson are among Taleb’s other Nobelist bĂȘtes noire.

Taleb’s new book, Antifragile: Things that Gain with Disorder, argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success.