Nassim Taleb: "The Fed's Business Is Price Instability"

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As we try to figure out how it is possible that the market can still be trading down on a massive POMO day, here are some thoughts from Nassim "Fat Tails" Taleb, who has obviously ignored the surgeon general's warning not to discuss the Fed. A visibly agitated Taleb, who may or may not have overindulged in the coffee IV drip earlier, was in full form on Bloomberg TV with Erik Schatzker lamenting that the Fed is not a publicly traded entity with options so that one can buy some seriously out of the money puts on Brian Sack. No choice words were spared, or Black Swans strangled, during the filming of this clip.

 

Taleb's thoughts on Bernanke and the Fed:

"It seems to me, from what I see, that these people [Bernanke] do not understand risk.”“Did [Bernanke] see the crisis? Did he see the accumulation of hidden risk in the system? No. He was flying the plane and he crashed the plane…"

"[Bernanke] underestimated risk. He is sort of risk-blind from his analysis of the situation before the crisis when he deemed it was the right moderation."

"[Bernanke] reminds me of LTCM people. They had brilliant people with great academic records and they blew up the fund and almost blew up Wall Street….So here we have a symptom that you notice in economic academia of the use of the wrong tools that underestimate risk. I don’t mind someone saying this is a policy, these are the risks, these are the returns, let’s see how it works. Bernanke does not seem to be taking that approach. He is someone who talks about returns without talking about risk. It’s identical to a pilot who is talking about speed -- not talking about safety. The measures he is using, this quantitative easing, may work but should it fail the risks are humongous.”

Taleb commenting on former Fed governor Randall Kroszner's statements that QE2 makes sense:

"This guy [Randall Kroszner] was governing the Fed? It's good that he moved to the University of Chicago. He reminds me of those people that sell out of the money options and claim that it's safe. This guy is not only claiming that its safe but that it’s the thing to do…He should definitely stay at the University of Chicago and not get involved in economic life."

Taleb on the risks of the central bank's quantitative easing:

"Talk to a German, particularly someone who has studied Weimar Republic and you’ll understand what the risks are."

"You short an out of money option on hyperinflation…The point is that you may print, print, print or do these devious methods to hide that you’re printing, but it won’t have any effect. Just like a ketchup bottle that you pour and nothing comes out. And then you make a statement like Bernanke saying you have evidence that this is working, that there is no risks, and then suddenly, just like an out of money option, the whole ketchup coats your French fries, everything, the whole table, your face, everything.”

“Let’s go back to the basics. [Bernanke] did not see the risks in the system before. Why are you listening to him when he talking about what to do? Why would are you listening to him?”

“Assuming there is a very small risk, who is bearing that small risk? Retirees. The debasement of the currency is something that would be borne by those who were the victims will not be the ones who benefited from the crisis. The thing is that you’re trying to print money to bail out those who have made mistakes by taking a mortgage that they shouldn't have taken…and by bankers. Who is paying the price? Retirees. And you’re debasing the currency and people who hold your currency. It’s an insult to those who have bought dollars in the past."

Taleb on what he believes the Fed should be doing instead:

"It’s not a Fed problem, it’s a deficit problem."

"People want a free lunch. It reminds me of people who lose money in the market and when I was an option trader, people would call me up and ask for a magic way to make their money back. That’s what the Obama team is doing. Instead of accepting that we have a risk problem, we have lost money, and you don’t double up with future generation’s money either by increasing deficits and or debasing the currency. You have to face the saying that there is no free lunch."

“The main problem was risk in the system. You cannot solve a risk problem by risky methods. You have to accept…We’re forcing the Greeks to reduce; ok you spent money you didn’t have; now you’re going to cut down. We're going to have to face the same thing. And you’re going to take pain, it’s painful, but that's life."

"The Fed's business should be price stability; unfortunately their business seems to be price instability."