Taleb Says Bernanke Doesn't Understand Risks of QE2

the ink was barely dry on the Fed statement last week announcing qe2 when a distrust email lit up my inbox quote-unquote something needs to be done about Bernanke and it was from none other than Nassim Taleb the prophet of risk economists distinguished professor at NYU and author of the Black Swan fooled by randomness and the soon-to-be published bed upper-crust ease nassim has some deep concerns you might say about u.s. monetary policy and he is breaking his self-imposed media blackout to raise them right here on the inside track the same we love it when you come in tell me what is your beef with Bernanke but it's it seems to me from what I see that these people do not understand risk okay to explain because people would look at Ben Bernanke right yeah long career at Princeton yes nobody would would count him out as an intellect an expert on the depression how is it that Ben Bernanke doesn't understand risk two things the first thing is that he sees a crisis that he sees the accumulation of hidden risk in the system no so and he was flying the plane he crashed the plane because he didn't see II didn't know about hurricanes or things that can cause turmoil so visibly he underestimated risk he's sort of risk blind from his analysis of the situation before the crisis when he deemed it was the Great Moderation that's number one number two he was he reminds me of LTCM people long-term capital management he reminds me of them you know here you had brilliant people was those great academic record and they blew up a fund and almost blew up Wall Street okay and and of course the Fed helped you know save and of course the Fed did not learn from the misuse of tools so here we have a symptom that you notice in economic academia of use of 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's 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 it may work but should it fail the risks are humongous I was in Europe last week and and everybody was obsessive about about Bernanke nassim let's talk about what randall Kroszner was discussing with us now this we've heard his comments there and he also told Deirdre that qe2 makes sense because it's an insurance policy effectively against deflationary expectations and maybe the only way for the u.s. to avoid a repeat of what we saw in Japan this guy was it was governing the feds he was the governor of the Fed yes hardly an economics professor it's good it's good that he moves to University of Chicago it's like he reminds me of those people who sell option to sell out of the money option and claim that it's safe all right and in this case this guy not only is claiming that it's safe is saying that it's a thing to do for insurance purpose he should definitely stay at University of Chicago and not get involved in economic life nothing when we were talking before the break you said that Ben Bernanke is not only the man who crashed the plane he's back in the pilot's seat and he is ignoring risks yeah the question for you is this how much greater are these risks now that quantitative easing is in place than they were beforehand okay go talk to a German okay particularly someone who has studied whyme our republic and they'll understand what the risks are you're short an out of the money option on you know hyperinflation because I've been look at how gold is reacting so the point is that you may print print print you know or these devious methods you know to hide that you're printing and nothing no effect just like a ketchup bottle you're pouring guess we've catch up and nothing is coming out and then you make a statement lock button on key that we have evidence that this is working all right okay that there's no risk and then suddenly just as was announced money option the whole catch coats your french fries clothes your friends everything the whole table everything your face everything so this is the the the the the problem of non-linearity is that the economics establishment has not been able to understand let me go back let's go back to the basics he did not see the risk in a system before why are you listening to him when he is talking about what to do why are you listening to where do you see the risks you mentioned gold where else are they no no let me talk about something a little more even more serious is assuming there's a very small risk who is bearing that small risk people who are retirees the debasement of the currency is something that will be borne by those who were the victims will not be the ones who benefited from the crisis the thing is you're trying to print money to bail out those who have you know made mistakes by taking a mortgage action be taking by doing people make a lot of mistake and by bankers who's paying the price retirees and and and you debasing the currency and people who hold your currency you say it's an insult to those who have bought dollars in the past okay so so it's not the fact is that you have this not only this asymmetry that we've seen with the Obama administration as those who pay the price are not those who got us here okay but and there's an addition to that you have the morality is we're making future generations with the deficits it's a whole package of deficit these are you agree with Alan Greenspan that the intent effectively of quantitative easing is to devalue the currency that the basement as you describe it I I don't know I don't when I hear a Greenspan I don't shut down so I don't listen because I don't think he was one of the other pilots well this is what they've been thinking with the economy trying to think of the economy thinking they're smarter than the economy trying to iron out the cycle and he effectively by putting interest rates as close to zero invited people to take these hidden risks and they didn't see it I've given you plenty of opportunity to trash Ben Bernanke I know how you feel about quantitative easing but people say hey it's easy to be a Monday Morning Quarterback tell us what the Fed should be doing instead what should Ben Bernanke be doing what should Randall Kroszner whom we quoted earlier have been doing it's not a Fed problem it's a deficit problem we're having here the the the people want a free lunch it reminds me of people who lose money in the market and then when I was an option trader and would call me up for a magic way to make their money back that's what that's what that's what the Bernanke sorry 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 generations money either by increasing deficits or by debasing the currency so it's the same if you have to face the things that there's no free lunch that with dead you cannot solve a main the main problem was risk in a system you cannot solve a risk problem by you know by by risky methods you have to accept you know what we do to the Greeks we're forcing the Greeks to reduce their say okay we spent money than have okay now you're gonna have to cut down we're gonna have to face the same thing and you're gonna take pain it's painful but that's life okay so here we need then to change the feds dual mandate should the Fed not be worried about full employment and price stability should the Fed be worried about something else right now the feds business should be price stability unfortunately their business seems to be a price instability that's that's the can I mean the the not fulfilling you know what we want from a currency that replaced gold think about this country does not apply to currency it applies to the US dollars priced I mean I guess there is obviously a derivative of exactly visibly if you see gold tripling in price and now the goes about 40 percent and then in the past couple of years if you see things tripling in price it's gone and transfers to goods and services it's going to transfer to things and people are going to jump on and start accumulating these items that currency without government so the Fed is not there to put paint put cosmetic paint on a fundamental problem which is that we had too much debt in the system and that that needs to be broken and by punishing those who got us here not by punishing the other people and I can't understand I came to this country from Lebanon when the currency went from three twelve dollars about $1,500 okay I remember I was complete and I came here and I felt stability I feel now as in 2/3 as when I was in Lebanon what I went as a child it was the beginning of civil war when they started printing I say oh no no don't worry about it okay it was just temporary okay these things are never temporary I actually have an aphorism here by saying nothing is as permanent as things called temporary what does this mean before we go I want to ask you the better per Krusty's the Black Swan people got that image and what's this all about there was a gentleman who has an end he was actually abducted travelers and he had an end and he would feed people a great dinner and after dinner he would put him in a bed those who were too tall to cut their legs and those who were too short to stretch them and and his nickname has Procrustes meaning the stretcher in greek it's about a situation in which you try to change humans rather than change your methods it's nicely like fitting a square peg into a round hole exact like I was the idea came to me when I was I went to a tailor for a tailor-made suit and I realized that have the tailor Ben Bernanke on economists they've put surgery on me to fit the suit rather than change the suit to fit me so analogy in your mind applies to the US economy of course to economic message to social science they want to change humans just like what Greenspan they want to change no more bubbles you want to change the you know this new topic view of the world you want to change the world to fit their model rather than change your model to fit the world ok that's seen the love it when you come to the inside track please come back soon Nassim Taleb always outspoken you can't afford to ignore him he is the author of the black swan and the soon to be published bed of pork Rusty's

Channel: Bloomberg Quicktake

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Keywords: Taleb, Says, Bernanke, Doesn't, Understand, Risks, of, QE2, All, Media, Video, Asset-Backed, Securities, Audio, Visual, Banking, Bloomberg, Bond, Market, News, Central, Banks, Credit, Crunch, Crisis, Economic, English, Multimedia, Federal, Reserve, Stimulus, Plan, Financial, Services, General, Government

Id: dZLQW_i0zVU

Length: 11min 1sec (661 seconds)

Published: Fri Mar 23 2012