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Why Central Planning Leads To Instability. Bass Reads Taleb
During his recent lengthy discussion on the broad topic of global central bankers, optical backstops, and our coordinated cognitive dissonance, Kyle Bass, of Hayman Advisors, suggested everyone read "The Black Swan Of Cairo" penned by no less a tail-risk philosopher than Nassim Taleb (and Mark Blyth). The Foreign Affairs article from June 2011 brings into clear prose the fascinating dichotomy between the centrally planned smoothing efforts of world bankers and politicians and the inevitable (and much larger) instabilities that spring from this suppression.
It is both misguided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high-impact, low-probability “tail risks” to disappear from policymakers’ fields of observation.
With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise - and no stability without volatility.
Why is surprise the permanent condition of the U.S. political and economic elite? In 2007-8, when the global ?nancial system imploded, the cry that no one could have seen this coming was heard everywhere, despite the existence of numerous analyses showing that a crisis was unavoidable. It is no surprise that one hears precisely the same response today regarding the current turmoil in the Middle East. The critical issue in both cases is the arti?cial suppression of volatility -- the ups and downs of life -- in the name of stability. It is both misguided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high-impact, low-probability "tail risks" to disappear from policymakers' ?elds of observation. What the world is witnessing in Tunisia, Egypt, and Libya is simply what happens when highly constrained systems explode.
Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These arti?cially constrained systems become prone to "Black Swans" -- that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.
Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems.
Seeking to restrict variability seems to be good policy (who does not prefer stability to chaos?), so it is with very good intentions that policymakers unwittingly increase the risk of major blowups. And it is the same misperception of the properties of natural systems that led to both the economic crisis of 2007-8 and the current turmoil in the Arab world. The policy implications are identical: to make systems robust, all risks must be visible and out in the open -- fluctuat nec mergitur (it fluctuates but does not sink) goes the Latin saying.
As Jean-Jacques Rousseau put it, "A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace so much as freedom." With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise - and no stability without volatility.
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I was just injecting a bit of humor.
Generally speaking (there are also brilliant black people), you're arguing a point that nearly everybody knows, but few people want to say out loud. It's rarely worth the ensuing hassle...
(there are also brilliant black people),
Name one.
Thomas Sowell
What did he accomplish?
"Sowell has stated that he was a Marxis"
...and that wasn't even spelled correctley.
All blacks are socialist because they can't make it under any other system.
Without white people blacks have NOTHING...prove me wrong.
bob_dabolia .I am sure some black ass USA soldiier,fought his black ass off , to save your white trash ass.
...Can you prove me otherwise?...
To make my point I can only use the example of Jefferson himself, whom you consider as icon. He fucked his black slave with relish. She was the pearl of his bogey nights. You cannot fuck a woman and then deny her humanity. If you do you betray your own soul of honourable man. If you say 'She is just shit that I consume' you condemn yourself as then 'you are worse than shit yourself, the enemy of your own values.' That was the whole point of my statement : I have seen the enemy...I can't be more concrete than that example. And Jefferson was no KKK type. If so, he would be total sham. No, blacks like american indians are sons of mother earth. Their place is everywhere, a thing that colonialist white America has decreed as its sole rights for ONE ethnic group. Do unto others....golden rule of humanity, obligation of naton states, as honour and keeping given word is silver rule of individual man.
So if Africans rounded up a bunch of white Americans and enslaved them in Africa, it wouldn't be reasonable/appropriate to send those white Americans back to the US to be with "their people?"
You see the blacks of South Africa saying to the Afrikaner community 'fuck off back to Holland? Where and when did your dick lose its primal intelligence, friend?
No they kill and rape them instead.
Read some history. The blacks now murdering and raping white South Afridaaners were migrating southward into South Africa at the same time the Boers were migrating from Capetown northward, There was a clash, the whites won (for a time), and incorporated the blacks as a work force. Then the Boers themselves were conquered by the ubiquitous imperial English hypocrites.
The Boer war war was instituted by British Jews who could not countenance the high wages given to the blacks by the Boers.
The few Blacks truly indigenous to the area of Capetown, that arguably were exterminated by Europeans--the so-called "Hottentots"--were a radically different "little" people from the Bantu, who gleefully joined in eradicating them,
You keep repeating multicultural talking points when the reality does not support you.
Oh I see, and aparthied occurred on the moon. Nope, the blacks never raped the whites on their OWN soil, they molested COLONIALISTS, as was legitimate. But once the nation state is estabished with equal rights IRRESPECTIVE OF COLOUR, CREED AND ETHNICITY; then we are in a new modern configuration, post Enlightenment, and being anti-multiracial is like pissing in the wind. Don't be nostalgic about the age that demised when Eleanor Roosevelt inaugurated in 1948 the new norm, tipping point around the world, in post holocaust context; final proof of man's racialisitic folly towards man.
What reality does not support that??? The KKK version or Putin's fascist hooligans?
..."he fucked his black slave with relish". How come,was that all he could mustur(d) He is lucky her husband did not Ketchup to him.....
she was his young adolescent mistress, read about it here :http://www.pbs.org/wgbh/pages/frontline/shows/jefferson/slaves/
Regarding the Bogey man, of course you are right, but he was writing for one of their key public magazines. Central govt works as a code word - who would dare speak to what is really happening in the MSM?
1963 was indeed a major turning point. Corruption had been going on already, but at that point, something cracked in the veneer and it began spreading into the rest of the culture. By the time of Nixon, it was deeply entrenched and began coming more fully into fashion.
The difference with the U.S. is that the ideals in the constitution and the high- minded talk make the loss stand out strongly. Also, at a global systemic level, the U.S. was an important placeholder for freedom, creativity, etc. Other countries are in deep trouble as well, but glaringly open U.S. corruption is a big loss for the global psyche.
Falak,
Greenx100
Thanks for writing the above-----true as anything here om
Huge piece of work
20 point plan for a better future, word document
Read it. send link to all your legislators.
http://www.box.com/s/2bpvloklliy3rz59k4jq
problems with this:
1) even more affirmative action? oh noes!
2) cut fuel prices how? And if you want to abolish fossil fuels, why subsidize the price of gasoline?
3) no more homelessness? how?
4) if you subsidize post secondary education more, it will just cost more. Don't go to college if you don't want to pay for it, don't make me pay for your education. Once you're 18, you need to be responsible for yourself. Not everyone needs a liberal arts degree.
5) move towards an end to fossil fuels and nuclear power - good job geniuses what will we use to make up that massive energy shortfall? Forget going back to 1929, these guys want us to go back to paleolithic era.
6) debt forgiveness for those taken advantage of by the banks - how do you determine who was taken advantage of? some personal responsibility here as well. You chose to get a $300K+ house or go to an Ivy LEague school, now you pay for it. geez.
I'm trying to think of how to distill Taleb's piece, and it really seems to me that he's saying that complex systems are too complex to attempt to regulate or predict or blame people for its failure and therefore just say c'est la vie.
It reminds me of the best verse from the Grateful Dead's Terrapin Station.
There are some things unknowable and uncalculatable, because the variables are too many... Read the pretense of knowledge from Hayek and you'll understand.
Two conflicting concepts...both of which I appreciate on their own
"there is no freedom without noise - and no stability without volatility" and "fail small fail fast"
The problems we have today all tie to money creation via debt. The noise that we should be experiencing is fail often fail fast. Banks, as businesses should rise and fall as often as any other enterprise. But they do not solely because we prevent the "noise" from happening by proping up a failed quasi business/fascist model of banking/debt/money invention. If we allowed the "fail small fail fast" (i.e. capitalism) to take it's constant course we would endure MUCH less volatility and MUCH more stability.
The volatility we experience is not just Black Swan events, it's a direct byproduct of the design of our Central Banking/"private" banking/debt-money system. So, even though I completely agree that models may undervalue or ignore the tails...I cannot blame fundamental design flaws on random tail events.
Humans are hard wired to always take the easy road out, it increases their reproductive success rates (aka their re-electability, popularity and status in society). To be intellectually honest and humble enough to do whats right for the long term, must mean that you will fail on the short term. Mother nature is stacked against you.
If you do whats right for the future generations, the current ones will lynch you.
When is the time of a clock like the whistle of a train?
I have a question, in Mr. Bass first sit down interview, his comment that the U.S. is in a better position than Europe because the U.S. banks where recapped with 882 billion, located at 25.0 min. into the clip located here, http://www.youtube.com/watch?v=5V3kpKzd-Yw
The interview was Nov. 7th correct? Then this Fed audit hit's, http://www.dailypaul.com/187659/audit-the-fed-reveals-details-of-16-trillion-in-secret-bailouts showing a hidden 16 trillion correct?
If that is the case, does this put all countries closer to the edge or just kick the can down the road that much longer?
What is it that is always coming but never arrives?
Robotraders mom.
"Shaft!"
tomorrow.
What squeals louder than a caught rat?
"Shaft!" - No wait!
janet napolitano getting fisted by barney frank?
Whose to say the instability isn't centrally planned by the oligarchs? We already know the common refrain... (and I quote) "the cry that no one could have seen this coming " is unmitigated bullshit. The thesis is based on a false premise.
Centrally planned faux chaos.
It's all laid out with one goal. To invoke the Law of Necessity. Which happens to say "Necessity knows no law."
Customary law has been turned inside out in every way. From conveyance of real property to trial by jury. The "law" is in the process of being eviscerated. There is no need for the King to have sovereign immunity to be above the law. Now you just have to combine FUD with MAD and you are untouchable.
How do you stop a dog from barking in July?
As this will be my final riddle tonight I will simplify your life as such.
How do you stop a dog from barking in July?
You shoot him in June.
But you ask "how do I prevent getting shot in June so I can bark in July?".
You bark now ZHeeple. You bark now!
Some wise advice for a change! ... but, sadly, too few ZHeeple will bite (or bark). They're too busy spruiking their messiah.
You shoot him on the fourth.
What are the rules? No one seems to know, anymore. The chaos in the investment environment, resulting from brazen lawlessness, has literally turned the financial world upside down. The consequences of the next actions taken will last for decades.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
That's the whole point. It won't take decades, it's like stacking a pile of sand, you get to a point, and there is a cascading failure.
Taleb and Bass are the shit bitchez!
libertarian86.blogspot.com
The Constitution was centrally planned.
The Apollo program was centrally planned.
The D-Day invasion was centrally planned.
The design and production of the 787 was centrally planned.
The Hoover Dam was centrally planned by 35 engineers.
Central planning or system engineering is the only way to achieve great things.
Do not mix up central planning with centralized corruption. The absolutely corrupt would like you to think that they are central planners, when in truth, they are just covering their thefts. Also, central planning or system engineering always works when it allows for the human element. Social engineering is always grandly destructive of human spirit.
Bananas and good women are also that way (?)
Hey so were the Pyramids, but at what price does your greatness come?
Check out the pretense of knowledge, the Nobel speech, by Hayek. I think you'll find it intuitively enlightening.
Oh really, all moves by every soldier on D-Day were centrally planned? Noone was allowed to adjust approach and strategy at all??
Fail.
My 30 year career highlight! Just retired! 4,160% return in 2 years in one stock!
http://www.bostonwealth.net/2011/12/03/416-return-for-a-client-in-one-stock-in-2-years/
Best part from that Kyle Bass video posted last night was when he mentioned his delivery experience with COMEX. If you missed it, go to 42min mark http://www.youtube.com/watch?v=5V3kpKzd-Yw&feature=youtu.be
I enjoyed the article and I believe Taleb and Blythe nailed it, however it isn't anything new or revolutionary. These are the same ideas that Ron Paul, and numerous other freedom minded thinkers have been saying for quite a long time. It's the reason our constitution was written to limit those in power and what they could do. Unfortunately, we have fallen victim to the slow burn of gradualism. We have allowed those in power to amass more and more of it. We have traded freedom for security, be it economic or otherwise. Now we get to reep the rewards of our lethargy. The years of suppression and control have created so many monster imbalances that the unfolding of what comes next will likely be orders of magnitude worse than anyone imagines.
Somehow MillionDollarFuckhead hijacked the green arrow,....or there is an awful lot of idiots on the site tonight.
SP500 bull vs bear battle reverts to bearish bias after price action on Friday and more downside expected.
My long term indicators have continued to warn of US Dollar strength and EURO weakness and these signals have increased since 2009. The overdue dollar rally should be substantial.
http://stockmarket618.wordpress.com
i did listen to the aforereferenced kyle bass inverview/trialogue that referenced aforeposted article and found it on my own and thank you for posting for everybody, tyler.
Go read Matt ridley's "the rational optimist". I think you'll find it enlightening. Also, and more foundational, anything by Bastiat, maybe start with "the law". I can assure you, it will resound with you, and you'll be glad you did. Bastiat is f'ing awesome!!!
Good stuff as ever form Taleb.
This idea of artifical suppression of risk eventually causing 'Black Swan' events should be well known the US Govt. I read about the policy of preventing fires in US forests for many years allowed a dense build up of fallen trees and brushwood to build up to the point that when a conflagration did occur it was catastrophic. Allowing regular fires to occur, while causing some damage, means fires that are relatively small and that burn out by themself. It has the positive efect of clearing teh build up of combustible material and is a natiural process in all forests. Problem is that when the policy of suppressing forest fires was changed, to allow fires to occur naturally, it also inevitably produced catastrophic fires and had huge political ramifications.
The anology with the US financial system is clear. The build up of debt (brushwood) and failed banks (fallen trees) in the system has rendered the system highly vulnerable. The debt should have been written off and banks allowed to fail long ago. Problem is that the consequences of that change of policy would now be a catastrophic fire in the financial system - hence we have TBTF banks that cannot be allowed to fail. Politicians and central bankers are now too frightened of the consequences to allow the system to cleanse itself - it will though happen one. The financial system wil one day catch fire and the catastrophe will be huge. The only game that politicians and central bankers are playing now is to 'kick teh can' and to hope it does not happen on their watch.
I am a Taleb fan, too; although I don't accept EVERY point of view he has. In particular, central planning is certainly obsolete, in the particular forms it took, till _now_....
But there are other ways to do it, which haven't been tried, anywhere in the world, yet.
E.g. genuine "socialist planning" has never been implemented, simply because there never was any real socialism, in the true sense of the term. The USSR was one hell of a big capitalist (state)!
OK (so I hear your objections)... So, what the hell is this "real socialism", then? -It is simply the (perfectly feasible) attempt to coordinate, democratically, a vast number of (basically autonomous) self-organised communities of producers, who interact freely with each other, exchanging goods and services without any restriction, except ONE: It will be prohibited (or severely discouraged), in this system, for anyone (else) to OWN means of production; all the factories and farms (etc.) should be owned by the workers themselves. THIS is the socialism of the 21st century. Described par excellence by an internationally esteemed American Professor:
Professor Richard D. Wolff: http://rdwolff.com
So why does HIS system work? -Because it allows the existence of the most FREE of free markets possible. And because the system is self-regulated by the people themselves, at every level. Like an organism...
In reality, you don't need any "central planning" as such, in this kind of system. But you do need democratic coordination, as well as free market exchanges between self-organised communities of producers.
"Those who seek to prevent volatility on the grounds that any and all bumps in the road must be avoided paradoxically increase the probability that a tail risk will cause a major explosion."
This article posits an equivalence between economic modeling and political modeling. We can imagine what a 'bump in the road' might be for the financial economy -- the loss and gain of money perhaps. In this case the suppression of volatility would mean systemic backstops that would prevent some people (but not all) from losing money. Taleb's prescription to end such backstops at least is intelligible, but what does 'bumps in the road' even mean within the context of politics? It certainly isn't one in which the freedom of the other is regarded as a true end.
A key problem with the text can be found in this phrase:
"Complex systems that have artificially suppressed volatility tend to become extremely fragile."
There is an implied naturalism in their very conception of volatility itself, such that there can be artificially suppressed, ignored, misinterpreted or unrecognized volatility; then there can be good old fashioned, true blue volatility, the way God intended it. How is this determined? The critical question for the political sphere: How is volatility itself quantified? They say "Variation is information" but what is the form-giving function in which volatility itself emerges? What counts as being within the volatile?
In this argument there is just another model, just another confusion of catalysts for causes. There is an invisible, hidden line between mere noise and 'information in all its variation.' This is perhaps --perhaps-- less of an issue in finance. But it is a critical issue for politics; in fact it is politics itself. It is revealing that what is essentially a financial model is seen as a prescription for a political model. We have seen this time and time again. A systems theory which seeks to sublimate the human for the a cybernetic. It's the 1950s all over again.
They say "Complex systems are misunderstood." This is true. They misunderstand complex systems by drastically limiting their domains. They say: "Engineering, architecture, astronomy, most of physics, and much of common science are linear domains. The complex domain is the realm of the social world, epidemics, and economics."
Later they add this whopper: "Whereas in the past, which was a more linear world, this trait [fear of randomness] enhanced fitness and increased chances of survival, it can have the reverse effect in today’s complex world." The hubris here is breathtaking.
What kind of assumptions go into how things were in the past versus how they are now? Perhaps human civilization survived for so long and in such variety by recognizing the inherent complexities that have been here all along. Maybe the division of the world into 'complex' and 'linear' is very easy: linear systems exist only in the textbooks in which they were invented and no where else. There is nothing but complexity. They say you cannot blame the last grain of sand for collapsing the sand pile, instead you have to look at the system. But what counts as a grain of sand? It is assumed that the sand will be self-evident, just as what counts as measurable within volatility will present itself, free from our prior assumptions and models. Just as it is assumed to be self-evident what counts as a voice of the people or a 'bump in the road.'
The text ends with a quote by Rousseau that says "What really makes the species prosper is not peace so much as freedom." They don't understand this quote. Freedom is not merely 'degrees of freedom' or a statistical variable. Freedom has no bounds. You cut it off and then blind yourself when you assume that it will merely be 'volatile'.
+1 Good comment.
2017 — The Worst Case Scenario
Look at Italy versus the US. And then look at video from Government Gone Wild. This is all OUT OF CONTROL AND WILL CRASH! This is central planning at its WORST!
Can Europe Control Its Spending And Save The Euro (or Gyro)? Don't Look To China As A Role Model For Economic Growth Either
http://confoundedinterest.wordpress.com
Look at the charts of ineffectiveness of more debt from Treasury and Fed policies.
Have The Fed and Treasury Run Out of Magic Bullets? It Takes a Village … to Destroy a Global Economy
http://confoundedinterest.wordpress.com
Almost 3 years ago, I have corresponded with Prof. Taleb how the situation in the Middle East is untenable and will end up in a revolt.
In January 1st, 2009 & during the war on Gaza, I have articulated how corruption, dictatorship, and deficit in freedom and democracy shall be the engine for revolt. What surprised me is the timing, I didn’t expect it so soon:
http://www.palestineremembered.com/Articles/General/Story11960.html
the obvious contrarian counter-argument here is would the world be more stable with more discrete small scale interventionism?
could you cause small scale events to act as a safety release valve and help to autoregulate imbalances like controlled forest fires?
If one looks back to the track record of cold-war sponsored conflicts, insurgencies, and micro coup d'etats in the eighties, can
we really affirm that this was a more stable world? more stable in terms of what? cost and energy expenditure to maintain the
status quo of perceived western pax romana? more stable for whom? I'm not sure liberians, chileans, or lebanese would give
it the thumbs up. I think part of the incorrectness of the analogy that we can agree in economic terms on what is a systemic
crash, ie a massive drop in prices and a wild soar in volatility, undertainty which basically affects most actors save a few punters.
what in the world of geopolitics corresponds to that systemic crash where almost everybody is a loser? all-out global mistrust and war?