Sunday, April 19, 2009

Black Swan Proofing The World

Nassim Taleb suggests ways to make economic life closer to our biological environment: smaller companies, richer ecology, no leverage. The risk takers of the economy should be entrepreneurs, not bankers; Companies shouls be born and die every day, without making the news.
Ten principles for a Black Swan-proof world
1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”.
5. Counter-balance complexity with simplicity. The complex economy is already a form of leverage: the leverage of efficiency.
6. Do not give children sticks of dynamite, even if they come with a warning.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Be robust in the face of them.
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is denial.
9. Economic life should be definancialised. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
10. Make an omelette with the broken eggs. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself.
Stolen from The Big Picture blog. Go there. Read him if you want a more realistic view of our meltdown.

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