Financial Collapse: A Panel with Nassim N. Taleb & Robert Shiller - The New Yorker

my name is Nick palm garden I'm a staff writer at the magazine the host of this summit I have me two men who called this financial collapse early and often and with great eloquence now the problem with earning the right to say I told you so is that we all then expect them to tell us so again and again so here we are wondering what they're going to tell us this time to my immediate right is a Robert Shiller a professor of economics at Yale and also at the Yale School of Management the Business School he is a founder of the firm macro markets LLC and also of the Case Shiller home prices indices he's a best-selling author his book irrational exuberance in 2000 the year 2000 summed up the stock market bubble of the 90s and bubbles in general the second edition which he published in 2005 laid out the scenario of the real estate collapse which we've just experienced the effects of his most recent book with George Akerlof is animal spirits how human psychology drives the economy and why it matters for global capitalism to my far right is Nassim Taleb I have to be careful what I call him so he doesn't get annoyed with me he too is a professor of risk engineering at NYU's Polytechnic Institute and he's an author of to name a couple of books the wonderful book fooled by randomness and most recently the bestseller the Black Swan he is a he is an options trader his primary interest is chance which means he's into mathematics psychology epistemology a lot of things as well as finance but maybe he's best described as a provocateur as he declares the top of his messy website and don't suggest that he tidy it up my major hobby is teasing people who take themselves and the quality of their knowledge too seriously my first question and we may not even get past this one because we have 26 minutes this is a big one and it concerns some of what Malcolm just talked about is about confidence on Thursday we get the results of the so-called stress test from the banks which may tell us as much about what the government and the banks want us to think about the banks as it does about the banks themselves at any rate the stock market seems pleased with the early signs with the early reports as to what these stress tests might tell us as far as consumers are concerned Bob you had a column in The Times over the weekend it was about predicting depressions in people's sense of whether depression will happen or not he noted that people aren't is afraid of you know that people aren't as afraid of a depression as they have been in past recessions even though the fundamentals this time may be worse that is people and I'm not sure who these people are because no one ever asked me when they polled me I haven't been asked but people seem to be more confident than we would expect them to be now I'm sure confidence isn't the most sort of technical measurement in the world when it comes economics but nonetheless it's something that you and others have talked about so I guess my question start this out is might we be overconfident and if so why okay well that ties in with Malcolm Gladwell's talk which I really liked and I think that of course it's also a theme of my new book animal spirits right it's the economic fluctuations are acrid often I believe and I currently you probably also this vocal minority of people think that apparently variations in confidence drive the economy and I'm an academic I live in a world where nobody believes that and I suffered the feeling of ostracism or something that comes about but you don't let it affect your confidence but it certainly affects my confidence but I think maybe nassim and I are both curmudgeons of the network cynics at heart I'm a much milder cynic than the sea yes but underlying it there was this moldering cynicism about the conventional wisdom which is bothered me for my whole life and I guess other people are less bothered by it but in academia we've developed first I want to be clear that I'm not criticizing the whole economics profession but those guys who call themselves macro economists have developed and finance theorists have developed this notion of the economy that is just unreal it has no variations of confidence in it no no Humanity in it and what all about information processing and stochastic innovations and everyone optimizing and I you know I've I was pushed out of our macro program actually at you I you know it's the feeling it that it's the conventional wisdom is so strong I shouldn't say I was pushed out I was put into another course called behavioral economics and that's an optional course it's not in the core and then there were these core exams at every one studies and I'm not not on that and so I had an interesting experience I say I interpret it that I was fired by Tim Geithner for my views but I really don't know that happen I was on the academic advisory panel for the New York Fed for 14 years and then we got a new president Tim Geithner in 2004 and then I went to one meeting and I talked about bubbles was the probably the only one and it were my concern about the bubble and then a few days later I get this polite phone call from a young lady who said secretary Geithner is rotating the panel and wants to bring in new blood and you're no longer needed so was that because I'll tell you I felt very uncomfortable you know what it is about talking about bubbles and confidence it's flaky that's exactly the word you know what that means in academia it means like here's some guy who trails off and he's not basing it on scientific methods right the problem the reason we had so much trouble predicting this is that we got too scientific and everything had to be based on date or not scientific enough well it's a question of what is scientific and to me I think academics and lots of people misunderstand what science is all about maybe you can take off I'm a scientist sorry economics even science and they think so it is it is in the know ask a scientist if economics is a science and they tell you that economics make astrology look excellent right say much because science has declined by predictable offer than I have another I'm I am I like hard science and physics has done very well predicting phenomena to the tense you know decimal precision economists don't predict better than cab drivers typically a little worse often I'm going to be defending our profession if so so except for Bob Shiller who's now famous because he's the only one who predicted the the housing crisis and and and my friend Oriel who predicted the credit collapse but you have a severe problem with economics that we built a society that unfortunately has to depend on incompetent people okay they are in comfortable you don't have to make the point that they're incompetent collectively incompetent they are ok they're pretty much like medicine in 19th century going to a doctor increases your chance of death ok so so you have here you have an expert problem and of course what we have today the medicine today that we have today doesn't come from the top down academic medicine it comes from the barbers and Surgeons so we have here an expert problem a classical expert problem and we depend too much on economists and and my proposals was to have from years ago now people are starting to listen to me a society that in which economists can be as incompetent as they want without it affecting you myself and even Bob Shiller all right so this is what you want you want to society where you don't have too big to fail where you don't rely on a forecast something more organically organized along the laws of nature now as a scientist I've started now a systematic process of trying to correct to take the assumption that economists make the first one with a black swan I showed that statistical method they use work a lot worse and statistical method the cabdriver reviews all right the naive statistic you use all right the bell curve and all that stuff on all these metrics and econometrics that I showed them the Black Swan now we're going next and showing that everything is based on when you did your PhD you the optimization no now the Mother Nature doesn't optimize something gets fragile from optimization so they have all these dogmas that one country should specialize in wine the other one should specialize in claws and so on it doesn't work that way because mother nature likes things to be redundant and likes diversity and likes even within an organism huge amount of diversity its exact opposite the biologist knows the Edelman and gali result that shows that maximum redundancy is a lot better look you have two lungs I'm sure we do even at New Yorker you have too long snow two kidneys and stuff so we have a lot of Emily's kidneys and an economist would remove one of your lungs if you have to design a human they design a human who wouldn't survive because they remove one of your loans they say well it's too heavy and so on it's not efficient all right one of your kidneys most of your spare parts okay things that you have only in one I hope they would keep okay but but they like your brain and although out of everything but but but your your mother you'd have yeah so you have your head so that the whole paradigm is messed up empirically and theoretically so let's not call economics the science please and then you're not having to fail it's not that bad if you got a point that's he's not that honest I once served on the NSF panel for economics and we evaluated all the proposals that were coming in research proposal and I was in a bad mood I was feeling like you but when I read all the panel people I thought you know there are a lot of interesting is going on so in the perfect and and you have a I'm in between you to ram I'm the middle road you talk about what criticism that's valid they do go off track in academia and in other departments but there's something solid going on to Bob you said something to me in two thousand four we're in Barcelona like now all right you were sitting to my left and you said I agree with the person to your left I agree with Nassim and I seem you have to understand there's got to be a middle way all right and my reaction to you I told you I'm not saying crazy thing the world is crazy it delivered extreme events that was 2004 do you still think the same think extra the world has it has been delivering okay see one past two thousand years extreme events that you make some very over having an extreme point of view is not incompatible with vector of the world so you have to make sure okay crazy things happen got to be immune to crazy things right so removing economists from the planet would improve the planet okay so it's not it's not it's not a crazy proposal but the world is crazy look what they drove us into and how many people I mean look at Greenspan Bernanke all these messes they use linear regression okay don't work so it's not that my point is extreme the world is extreme and this is outrageous and then a hundred years people blame me like now already people are blaming me for being too soft on economists but I don't think I mean I we saying the economists are the the only problem here I mean in a way you know it's both Malcolm Gladwell with his outliers book and you with your Black Swan book have made a very important point that this so-called normal distribution is academic conceit it's not very reliable that we tend to get outlier big events and and unfortunately it's not easy to be scientific about them for example the big event we're going through right now we haven't seen anything like it since the Great Depression and that's so long ago that not many of us remember that and so what he what academics want to do by an instinct is to process data where I have a thousand observation but if all thousand observations exclude that fire they're making a mistake and I really wondered why academics continue to ignore this outlier problem is the academics that is regular people think and the same is because I can try but they're trying to pull the wool over our in a sense I'll tell you about academics I'm writing a dissertation I'm a young graduate student I've got to get on with this you know there's this outlier problem I'm not going to think about that they keep postponing it because they don't know what to do about it in terms of this framework the problem is that turn drives us back to a kind of judgment oriented approach instead of a statistical approach and they're not gonna do that but isn't that human nature and not just academic nature uh you're right it's not desire I'm a professor and I live in an environment about you know humans are better than academics in dealing with our pliers but still but there's one one problem it's not I mean a let's not misinterpret things it's not like economists use a bell curve and there is an alternative my point is that and you can show it scientifically or mathematically rigorously that they're small probabilities rare events cannot lend themselves to mathematical modelling simple because that you have an infinite possibilities infinite family of models that can fit the same set of observation and the same theory so here it so you have a degrees of freedom smelling out of proportion so my proposal was just not to rely to build something robust to outliers very simple it's not complicated cab drivers understand it when I was a pit trader I was a trader I was at option trade in Chicago everybody understood it people particularly people who are formerly cab drivers and probably in between it was we're going to go bust and go back to cab driving they understood that there's some risks you don't want to take only people who went to University of Chicago started taking these risks I say so you go oh no we can model it and so on but normal people don't make this such mistakes people don't make unless they have a form of pessimistic though this way we have a civilization that's built up by experts and it works pretty well and this crisis is not so bad this is and so you know we're exists this is a generalization this is the wrongs I like saying that we have experts in a dentist as an expert implies automatically that someone can claim expertise in macroeconomic data this is a extremely dangerous generalizations that you're making right we have been fighting illusion of control and and and and false experts since the dawn of civilization ok with all these charlatans when fighting it ok so the facts saying we don't have experts all right that are perfect there for economists can be imperfect it's totally bogus argument see it's funny I end up debating now see I know yeah we're a few and as my kindred spirit but now the point of this conference is for the next 100 days right we're going to be the we're going to be giving expert proposals to improve the situation and you seem to be saying we should call it off right now I don't know I have a clear plan to immunize society from the mistakes of experts it's very simple it's it's so logical to a cab driver okay you don't want banks to be too big to fail because you have an expert problem that compounds ok geometrically with the size of a unit okay you don't want yes in a way it's a version of procyclical in your book animal spirits yes about that have people sort of they will you know pursue strategies and everything will reinforce that pursuit over time their nature and the regulator's see now there's another whole aspect of the current crisis that some people at the financial stability forum at the Squam like group at Treasury Department that many different financial engineers are trying to figure out how to develop how to make a system that's less vulnerable to systemic collapse and we have seen progress in 1913 when the Federal Reserve Bank was created we saw progress in 1934 was it when v FD IC brought in Deposit Insurance and there is this really technical side to developing a better system do you think it's Hanna you seem to be referred to that when you said you want to get rid of the tube fail we're going to have to use an experts to design these things yeah but which were the ones who are doing the crisis coming the ones we're using today Bernanke didn't see the crisis coming as a matter of fact he spoke about Great Moderation when banks were increasing their hidden risks geometrically I mean I agree the things have been done but let's not go to 1913 let's go way back Babylon yeah that cancellations that we've known ok and and you know the the since since the ecclesiastic mediterranean societies have always known that debt causes instability because of that you cannot make a mistake that is Lomb still bands that they say to protect you from yourself okay so we need to bring down if you just brought down the level of that I'm sure you'd be satisfied with about a fifth level of debt that we had a high leverage is a sign of our overconfidence right right yeah exactly how leverage the problem is that we have too much debt if you just bring down the level of debt now what's the government doing they're having the banks to lend more and asking people to spend more and they're borrowing money sorry and they're borrowing money and they're born wrap up slightly over leverage Institute yeah so this is I mean a Babylonian would have understood it right they went through that and came to that conclusion right so we have what we're still we still have a primitive thing or we Cicero okay Cicero did not want governments to be in debt that creates instability it creates Wars it characterized invasions so why are we doing this again do the people in Washington realize this and still do otherwise or are they not aware of this just because their incremental moving at this point so for the next hundred days we have to think of big changes as you prefer I had a similar in my book subprime solution I was talking about a more flexible debt I called it in the term of mortgages I call it continuous work out mortgages I don't this is what you have in mind this is all final engineering this is devising a new system right and I think that it's going to so next hundred days it's actually going to take the next five or ten years we have to respond to this crisis with new institutions and you're right that some consideration of what form debt takes or what form financial contracts take but there might be a fundamental way to change the system to me I see it as a no brainer it's so obvious like so obvious that nobody's ever of course because they have PhDs in economics so you can't see it because too obvious you just convert that to equity all right in 2000 we had that equity bubble we came out of it almost horrible you know unharmed okay it was harmless okay look what happened when you have a debt bubble so converting debt to equity even people's homes it's a no-brainer it's a it's very easy to do so and I'm sure it will restart the economy on a solid basis we won't have that fake growth we had before we'll have fewer it won't make investment banks rich which isn't you know maybe not many and there are bother with that and there's proposals being talked that are analogous to that this is the proposal for regulatory convertible debt that automatically converts from debt to equity for corporations or banks upon a regulatory event right so I mean this may actually happen and there there is a tie do that and now if they do that then we have a healthier I mean it okay my point that the system is going to break still has not they don't see what's coming okay it's like if he has this huge snowball hitting us okay and nobody's noticing it it's kind of got a lot worse well that was my question together do people notice it you people watched and know this and are they taking steps to do the things you're talking about real structural financial guys while on you know in public saying things just to promote confidence just to keep us keep us happy long enough for them to tinker with the tinker with the works behind the scenes to really fix things because I don't know whether we can really tolerate the kinds of things would have to go to fix it abruptly right now maybe we should but politically it's it's hard to hard for politicians to do because people don't like to take pain it's a big thing because the culture would built a number one if you go to business school they teach you that that equity you know interchangeable and that is good if you have the edge and so on how you can increase your return or having bet I mean you learn all these bogus things in business school and until they they probably still think that that is okay that was okay probably in 1980 that is no longer possible today for what look at let me tell you even the levels we had 1980 I no longer tolerable today and let me tell you why how did you have a run on the bank in 1980 you went and waited in line okay it took a run on a bank - probably weeks today how do you have run on bank there are many of you familiar with this instrument that's how Iceland was bankrupt that by by by people pulling their money electronically so you can have these fads that that is an expert at these to take place over a long period of time now are almost instant now particular with Twitter all right so it's almost instant so you can no longer face you have the the variable that you've seen today the variation we see today over the past few years the price of oil from $25 $250 probably to $5 I don't know what's going next you see these variations we never experienced in history never so we have to be a lot more careful going forward because we have globalization the internet and operational efficiency that creates a lot of variations that cannot accommodate that so we have to bring down the level of that and a lot more drastic way I don't think they're understanding it that's the first problem they have the second point is that their instinct is to go for more regulation you forget that regulators are the ones who were partly responsible for us getting here by allowing banks to use value at risk or methods to measure the risks of rare events its overconfidence sorry aren't the stress test based on the the banks on risk models true it was it was it was something variation of it's totally incompetent that was without a regulator you won't have had that and the regulators also allowed that triple-a nonsense so I think the instinct to go for more regulation is what the they follow it now different regulation I think better yeah better I don't know what better regulation means he's you're a top-down economist I'm a bottom-up sort of libertarian so we have but I I think that what we have our capitalist system is like a sports game we invent rules that we operate by we have referees and football baseball soccer any of those they have referees and that's what regulators are and we find that sometimes there's thing called dangerous play where somebody's getting hurt and so we say okay we'll just change the rule so that that kind of thing doesn't come up so often and you and the players want the regulator's because you don't want to play if things are going on that will injure you or make it impossible to have a good game and and that's where I would have a different emphasis that we have over the centuries developed a regulatory system that many people scoff at but I think it makes our system work well and we just have to this is just another crisis another opportunity to improve it do you think of ailing ourselves of the opportunity I guess I promote for more regulated the ones who did basel ii who caused the banks to pay colin is that the problem is that the regulators mess up now they tend to compound the okay i think i want to give a kind word for regulators i think they're not your regulator they're not any dumber than anyone else no no no hold on hold off I thought I I tend to think that they're for someone I don't know if you know that I hope there's no regularly Oh actually I hope there's a regulator typically I've met a lot of regular to out like an option trader and they're people you can go around them so easily typically someone I don't know if you know many intelligent people who decide to become regulators come on no I've been doing you know I've been in the business of issuing securities and I've had to go to the SEC and I've met regulators and I was I hate to say I mean you're I'm impressed they seem like I think that I meant talk to someone whose son during the SEC I asked him why is he doing that because he could make more money on Wall Street he said well my son has kind of an idealistic streak in him and you know he doesn't want to be a Salesman he doesn't want to be out there promoting something he doesn't believe in and that's what you have to do he just likes it better with you I think that's true I don't think these people well let's hear a one cheer for regulators but I was about to say won't that streak of idealism be beaten out of them at the at the SEC I don't you know it's a it's a man you know at the SEC they have so many rules and our dealing with them it's always fitting into one of the categories or rules and you can't do that because of rule 147 a or and it sounds like nonsense but I do think that it attracts people who want the SEC is a strength in this country because it is trying to get the markets working right and and there's so many there's so many people who would take advantage of you and and try to conceal facts and delude you and the SEC is one institution that if we didn't have it our financial system wouldn't work so well any note I think I love now stands out I haven't seen any anything that convinces me that situation is better today than it was before you got started calling this a crisis okay right I haven't seen anything convincing I think that they don't understand on linearities they don't understand that that if you keep having 600,000 unemployed people in US and China and France that at some point may cause it's noble effect to accelerate they don't seem to realize that monetary policy is nonlinear in other words you pump money you get nothing you pump money you get nothing but money you get nothing like a Malcom's tipping point the story of the ketchup bottle you pour ketchup nothing's coming out and then suddenly the whole table full of ketchup okay there you may have hyperinflation all right so now the trade-off where I'm heading because of the system we're either going to get massive massive massive deflation or hyperinflation I see absolutely no possibility of anything in the middle because a small little error in policy okay can I compound one way or another oh I suppose we all hope you're wrong I hope I'm wrong I'm the first one to hope to be wrong some of us may believe we are going through a very experimental time right now and they just as roosevelt did now it's not Obama it's more Bernanke who's being the great experimenter and he's doing things whose outcomes are yet unknown but I think they're they're well-intentioned well-intentioned yeah just like his his his idea of calling what we had that all this risk taken by banks all right calling it oh we don't have risk in a system it's the Great Moderation that was well-intentioned as well we need to be protected he didn't predict these forces at all yeah no it's not hidden predicted he he condone that hidden risk-taking by bank when people like me were barking right this is impossible this is too much risk the methods don't work okay they were taking risks and he was part of the people who condone it I want him out of there someone who crashed the plane you don't give him a new plane and that's what you're doing you want us to do we have to stop sorry okay I end up debating guys we're on the same side it's like pro wrestling it's all fake back there they get along famously anyway I'm afraid we're done you know we could talk about this for 30 days but uh we only had 30 minutes thank you very much for coming

Channel: The New Yorker

Views: 136,505

Rating: 4.888763 out of 5

Keywords: summit 2009, Nick Paumgarten, Nassim N. Taleb, Robert Shiller, financial collapse, politics, culture, now, current

Id: AcTvkt8k0sE

Length: 30min 19sec (1819 seconds)

Published: Tue Jul 22 2014