Taleb Blasts Bernanke & Greenspan, Warns "Debt Raises The Risk Of Catastrophe"

Tyler Durden's picture

"Debt increases tail-risk," warns anti-fragility expert Nassim Taleb, "whether it's personal, corporate, or governmental." A rise in debt, he warns, implies nothing less than a rise in "the risk of catastrophe," and Taleb chides,  governments "should be focused in risk-management... instead of creating these risks." This brief Bloomberg TV clip cuts to the chase as the normally circumlocutory Taleb unloads on the perils of central banks, "Mr. Greenspan created tail risk by eliminating the business cycle," and since then tail-risks have accumulated with debt the "number one creator of these risks." In a fascinating phrase, Taleb notes, "corporate debt is benign," since in failure it turns into equity, "but government debt is another matter... for it turns into inflation or worse invasion..."

Reflecting on his "skin in the game" approach to risk management (forecast and over-confidence)...

"Mr. Greespan and Mr. Bernanke are unharmed by their mistakes... but who is harmed - you, me, all taxpayers."

On models ignorant of tail-risks

"borrowing money to 'create growth' is an incorrect thesis - take all the 'spurts' of growth from the Industrial Revolution onwards, debt has been used to finance wars - not a good thing...

On Keynes...

"Keynes understood uncertainty all too well and would have encouraged borrowing like this"

 

"Even Keynes would not have encouraged quantitative easing"

 

"There is no excuse to accumulate debt on the grounds of growth"

What are the elements that create the framework for the next crisis...

Simply put, Taleb says governments are "painting the tape" as headline numbers may look good but the middle class is being destroyed

 

It's Sunday afternoon, take 8 minutes and watch/listen to Taleb...

 

 

And the infamous Black Swan of Cairo article that repressing 'normal volatility' for long enough creates an ever-increasing likelihood of 'catastrophic volatility'...

ForeignAffairs

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Peter Pan's picture

Borrowing money for productive purposes CAN produce growth and good growth for that matter. The problem over the last decade or so is that too much of the debt went into bigger houses, more war, more excess cpacity, more granite benches, more cars, and higher salaries for useless public servants and their pensions.

Colonel Klink's picture

Try like the last 3 or 4 decades.

mayhem_korner's picture

 

 

Try 10.  That's when the Federal reserve was born.

NoDebt's picture

"circumlocutory"

I'm using that one at the water cooler tomorrow.

ItsDanger's picture

More like the last 40-50 yrs. 

markmotive's picture

This is how the world works. 1) Borrow for positive NPV projects, 2) Then borrow to keep growth alive, 3) Then borrow to prevent collapse, 4) Then collapse.

And then it starts all over again.

http://www.planbeconomics.com/2013/10/a-crash-caused-by-excess-debt-wash...

mayhem_korner's picture

 

 

Borrowing money against excess production is even more sound.  Fiat currency blurs that relationship, however...

Big Brother's picture

That's what the industrialists did prior to the creation of the FED.  This "self-funding" was making bankers obsolete; and these bankers did not want to be obsolete.  We all know how the rest of the story goes...

bunzbunzbunz's picture

I would say that even the borrowing that is used for stupid purposes like oversized houses and other bullshit still can produce good. If the 'lower classes' can afford something, it makes the 'higher classes' feel the need to make more money to buy more things. This theoretically produces cycles of improvement for everyone (new products means more demand for those 'lower class' jobs). It just doesn't last forever. But just because something cannot last forever, it is not certainly a bad thing.

Borrowing(leverage) is just another gamble people can make. When you get in a car, you are leveraging your statistics for survival in the attempt to get to your job and make money. So it is hard to tell where the line between reasonable and unreasonable leveraging is drawn. 

Withdrawn Sanction's picture

"So it is hard to tell where the line between reasonable and unreasonable leveraging is drawn."

It IS hard to tell in advance, given that no one has a crystal ball.  However, the general rule (and a point Taleb was making) remains true:  if the debt taken on does not produce enough income/product to repay the debt plus interest, then the debt was unproductive (or "unreasonable" to use your terminology).  Trouble is, we cant always know that ex ante; it is only revealed w/the passage of time.

Having said that, there are general classes of indebtedness that are, by their nature, unproductive.  Borrowing to facilitate consumption is one such class.  The reason is that repayment of principal and interest comes out of future income. Since the indebtedness was undertaken to accelerate consumption, it is not productive so future income is unchanged.  That means that the other things that the portion of one's future income could have bought will instead be diverted into debt service.  That's not to say such borrowing is bad in itself, merely that there is a cost to rearranging one's consumption patterns in time using debt.  If kept within manageable limits, it easy to see how consumption-based borrowing could be desirable by some.

But that's also the rub when it comes to government.  A large chunk of debt-financed government expenditures go toward facilitating consumption (i.e., are unproductive, such as income mntce and transfer programs to name just 2).  If the growth rate of the governemnt's ability to service such debt (often taken as the growth rate of real GDP) falls below the interest rate on the contracted debt, the instability of such spending policies becomes obvious.  IOW, in such a situation, debt growth becomes self-perpetuating and explosive.

bh2's picture

There is an essential difference between taking risks for which you will pay and taking risks for which others will pay. It is also the essential difference between free enterprise and government.

Dick Buttkiss's picture

Peter Pan's got a down-voter?

NSA? CIA?

Hi, guys.

I Write Code's picture

Probably Captain Hook.

Everybody comes to ZH.

ebworthen's picture

"...and higher salaries for useless CEO's, CFO's, traders, bankers, insurance companies, corporate wonks and paper pushers, MBA harpies and warlocks, military/industrial complex goons, and crony capitalism mammon lusters."

pondview28's picture

Only if borrowed from savers. Only if overall productivity is increased. Everything else is hand waving meant to distract by the political, academic, and financial classes.

BringOnTheAsteroid's picture

Why borrow, why not save for a period and put that saved money toward productive purposes. 

 

Why borrow, why, why, why, why, why. Are we are bunch of children who just can't wait. What if we eliminated the concept of borrowing, period. What would the world look like. Pretty much the same but without exhorbitantly rich individuals. Sure, the speed of development would probably be less, but after this crashes I suspect we're going back, way back before the state we would have achieved without the borrowing.

The Alarmist's picture

Egyptian spouting anti-American-way commentary ... time to warm up a few drones in the bull-pen.

Colonel Klink's picture

Obomba call your office!

I don't think they (downvoters) caught the sarc.  +1 for the effort to convey US foreign policy.

Harbanger's picture

 Meanwhile, Egypt has filed criminal terrrist charges against Obama with the International Criminal Courts for crimes against humanity. He is acccused as an accessory of Muslim Brotherhood. 

Harbanger's picture

Just one more thing the MSM is covering for Obama.  Here's where I read it, there are other articles.

Egypt charges Obama with "Crimes Against Humanity in International Criminal Court

http://www.dailypaul.com/305479/egypt-charges-obama-with-crimes-against-...

Edit; Here's a better link,

Criminal terror charges filed against Obama

http://www.wnd.com/2013/11/criminal-terror-charges-filed-against-obama/

The Alarmist's picture

Thanks ... forgot the sarc-tag to help the sarcasmically-challenged ....

kaiserhoff's picture

Lebanese or as he prefers, Phoenician.  Taleb takes a long view of things.

 

machineh's picture

Obama: 'Hey, I'm a Phonycian too!'

Big Brother's picture

He discusses the stability of 4000 years of Levantine city-states in Anti-Fragile

http://en.wikipedia.org/wiki/Levant

In the same vein...

The Iroquois when making decisions affecting their tribe, "tried to think how their decisions would affect those seven generations into the future."-  I read that on a toilet paper roll at my girlfriend's house today.  I think the brand name was "Seventh Generation"

Salah's picture

Yeah, right....take your meds and go back to the shallow gene pool you crawled out of... in West Viginny, Idaho, wherever.  Taleb's a coptic Christian from Lebanon.

Colonel Klink's picture

Oh well then I guess his opinion now matters.  Can't trust THEM Mooslims. :)

/doIreallyneedit?

sgorem's picture

fuck you, from the shallow gene pools of West Virginny and Idaho, and wherever.

kaiserhoff's picture

Great insights and summary of first principles from Taleb as usual.  Thanks Tylers.

I would only add that not only Fed Chairmen and bankers have been protected from risk and the consequences of their mistakes and abuse.  Government at all levels has had a free ride at the expense of the productive sector.   This too shall pass.

I Write Code's picture

Hey, good stuff!

I've been luke-warm on Taleb's black swans and anti-fragility stuff, I find these economic comments much sharper.

ziggy59's picture

Not just taxpayers pay...any saver, or person that breathes, eats, and sleeps, globally...

lordbyroniv's picture

FOREIGN AFFAIRS is a CFR publication.

Occident Mortal's picture

The only thing that has allowed the Fed to get away with $4 trillion of QE is decelerating monetary velocity.

Colonel Klink's picture

The trend is your friend but the switch is a bitch!

BITCHEZ

kaiserhoff's picture

There's always the dead cat bounce;)

Colonel Klink's picture

I was referring to an increase of monetary velocity being just a little problem.

Cats don't bounce much after you hit them with a financial shotgun.

kaiserhoff's picture

Not the only thing.  Weak and stupid trading partners have been a factor.

Ye olde, best looking horse in the glue factory is still holding up the dollar..., for now.

Cycle's picture

A good bit of that QE ends up going into the bankster's margin bets vortex, from which it never emerges.

Tasty Sandwich's picture

If they truly believed that stimulating demand would magically solve everything, they would load actual helicopters with $100 bills and drop them over the crowds at baseball and football games.

RiverRoad's picture

Re "decelerating monetary velocity":  Better known as "no jobs out there".  And TPTB will make sure that there aren't any either.  The present scenario sure is working well for them.

Aquarius's picture

Life IS Risk, albeit in diversity.

Life, is/means/must be/has to be encapsulated with full Risk, Humanity is a full heuristic Universal Force; our to be-being to be-coming, is entirely in our hands. We are not monkeys nor animal: we are of the Kingdom of Man the Accomplished, (obviously in evolution).

Risk is defined (in the financial circles) as computable (and acceptable) uncertainty. But, what the phuck would they know as they spend all their time gaming the system in their favour. We have no idea what will happen tomorrow (figuratively speaking) - this is uncertainty - due to this being a non-linear dynamic. This is a Primary Principle of Universal Life; emphasis, "life". Society driven by cowardice and apathy, demands no Risk and hence, pays the price of undeserved comfort. Politicians peddle Risk-free as snake-oil salesmen. Why? To get to the money (your money) to get to the Power and to grab more "money".. Here is the root of "terrorism". which is a priori, a political tool. Bankers demand Risk-free by Law, Legislation and Enforcement through coercion and bribery, albeit at our cost. The absence of Risk - produces "denial" and contorts and distorts Society. This is a scientifically  well founded fact. Humanity needs a teacher and suffering is the enemy that teaches. Does Bernanke et al teach or steal? Yes, we the West, live in "denial". Simple really. One of the best source of unfettered news in the World is http://www.informationclearinghouse.info/ Please support this independant and non MSM (yuk) one-man show if you appreciate the Free and Honest Service of dedication and have the means. I do not have the resources to contribute so I post this message in lieu thereof. Thank you.
The Alarmist's picture

I prefer the Dead Milkmen's version: 

 

Life is shit, life is shit,

The world is shit, the world is shit, and

This is life as we know it

This is life as we know it ....

 

And so on ...

ParkAveFlasher's picture

Try to run, try to hide, break on through to the other side.  -Jim Morrison

Seasmoke's picture

Madoff.....HA !! I still dont understand why that motherfuck pulled the plug on himself , he would have made it thru the scare ....guess he is a perfect example of why The Fed will never Taper

youngman's picture

Just how did it get started in Germany during the Weinmar republic....it had to start somewhere and with something..that is called faith I think...they lost the faith of the Mark..so they tried to spend it as fast as they could...

delacroix's picture

youngman, I believe the central bank, was turned over to private bankers, as a reperations condition, from the west. that's when the money printing and theft really got into high gear. the prior head of the central bank died of a heart attack shortly after the transition.