Taleb: Bernanake, Summers and Geithner Are Idiots, “Economists Have Been No Better in Their Predictions than Cab Drivers”

Nassim Nicholas Taleb wrote an open letter today to British Conservative leader David Cameron saying:

I despair of the Obama administration’s ability to fix this financial crisis and prevent future ones. I am appalled by the dangers it has been creating and its takeover by the same economic establishment responsible for this crisis…

Be careful, too, of the so-called science of economics. Economists have been no better in their predictions than cab drivers. We have an “expert” problem, in which the expert provides you with misplaced confidence, but no information. Because we think, correctly, that the dermatologist, the baker, the chemist are true experts (they know more about their respective subjects than the rest of us), we swallow the canard that the economists at the International Monetary Fund, the World Bank, the Bank of England and the US Federal Reserve are also experts, without checking their record. This reliance on faux experts is, for the most part, what got us here. Now it is continuing with the build-up of government deficit and an increased reliance on flimsy forecasts by the Obama administration.

This problem with experts was particularly acute when it came to the “risk models” on which bankers built those positions that turned sour. So it is that you are coming under pressure to provide more regulation. Alas, the need for more regulation is a myth. I have been fighting risk models both as a Wall Street trader and as a professor and my worst nightmares were the results of regulators. It was they who promoted the reliance on ratings by credit agencies. The “value-at-risk” models regulators promoted made us take more risks…

We replaced the heuristics of the elders with arrogant (and incompetent) beliefs, breaking, in the name of science, the chain of knowledge. Old, conservative bankers and traders have been replaced by keen young mathematical analysts, yet anyone who listened to a grandmother who survived the Depression would have been warned against debt and been better prepared than Ben Bernanke and Alan Greenspan, respectively chairman and former chairman of America’s Federal Reserve.

The solution is obvious: build an economy that increases the role of well-tested traditions. Ban financial derivatives that require advanced mathematics rather than trial and error. Look at mother nature. There is a complex system built around sound principles that has insured both evolution and survival. It does not let anything get too big to fail. It breaks things early. I don’t understand why people who stand against tampering with nature accept tampering with the economy that would have organically grown too. Work on building a “robust” society, capable of withstanding errors, in which the role of finance (hence debt) would be minimal. We want a society in which people can make mistakes without risk of total collapse. Silicon Valley offers a good example, where people have the chance to fail fast (and repeatedly).

The best blueprint is the very opposite of the Obama administration’s economic policies … It has been administering pain-killers without addressing the cause of disease. Obama is strengthening those who do the wrong thing. Take the “cash for clunkers” programme. It is a handout to those who bought the wrong – uneconomic – car. He is penalising people who did not make a mistake. The same applies to other “rescues”. By raising taxes after the crisis, the administration is hampering evolution. Those who do well in difficult times end up paying more tax and those who lost money in the crisis pay less. The rich who got us here are being rescued by regular Joes and being subsidised by the tax system.

Obama is giving the large institutions that failed us, like the IMF and the World Bank, even more powers. He is increasingly dependent on the visionary expert who failed us and does not understand the properties of complex systems and stifling long traditions of wisdom in understanding risk. Just consider the players: Larry Summers, director of the National Economic Council (who, among other things, made both Harvard University and the banking system more fragile), Bernanke (who increased reliance on the error-prone “models”) and Tim Geithner, secretary of the US Treasury (who failed to understand that property prices can take extreme deviations).

For background on why modern economists got it so wrong, see this.

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  • Taleb adds nothing to the understanding log density functions that econophysics starting with Mandelbrot has produced for many years–except a colorful moniker and lots of self-promotion, IMHO. And is he really starting a hyperflation-trade hedge fund? Is this consistent with the views expressed? It's so myopic to view our system's collapse as a failure of economics or economists. Here the public choice theory is persuasive: there is always a credentialed economist to trot out to support the ruling party's views. Look at the damage that Art Laffer helped to visit with his bogus "supply-side economics," a ruse for Reagan's tax cuts on the rich that began the inflation of the U.S. federal debt balloon.The economists-in-power are prostitutes, just like the politicians. During the "financialization" of the U.S. economy, i.e., the debt bubble, they promoted policies friendly to capital. During the next regime, if change becomes possible and we don't descend into a new Gilded Age as Emmanual Saez worries, the economists in favor ought to be those that favor labor and social welfare. But it will take cleaning up the money-addled political system to get there.

  • Awesome post, GW; thank you for the gradual progress of public education. And Benign Brodwicz!!! You took my thought and expressed it better than I ever could 🙂 Yes, the economists we see and read from the mainstream media are myopic to their small section of research that is reinforced through rationed federal grants to their universities. Then there are the prostitutes, who have sold their academic soul to become psychopathic conspirators in the controlled demolition of our economy. (I use psychopathology not as an ad hominem, but as the most accurate description of their behavior that I know: destructively anti-social with a veneer of socially acceptable behavior. Look it up).The example of Laffer is brilliant. John Kenneth Galbraith, writer of 5 best-selling economics books, called "supply-side" the older "horse and sparrow theory" – that is, if you feed the powerful horse then the little people/sparrows will pick out some of the benefits from the powerful's excrement.So these economic whores are not idiots, at least in their short-term view. They are psychopaths with an intelligent strategy to break our economy. They are addicted to money and power: never having enough and going back for more. Money MUST be removed from our two-party illusion of the single-party plutocracy, and monetary reform must replace our bankster-captured economic heart. Monetary reform is a general term for what GW posts regarding Ellen Brown's articles and the American Monetary Institute's work (partner with Dennis Kucinich).BTW, Paul Grignon just released an updated version of the BEST TOOL I've found as an economics teacher to understand our monetary system and monetary reform: Money as Debt II: Promises Unleashed. You can preview it on youtube and purchase the dvd from the artist 🙂

  • May be the master plan of this must be realistic and in short time. So, many country can get up from this problem, global crisis, and in my reason, I prefer make economic in lower level go up, so didn't just in wall streets but in society too,please visit me too…

  • When you sell deregulation and privatization as an economic plan and then inventmystical math programs to take advantage of what you know will happen, then change the rules to allow your levarage to rise to 100/1 and base it on a known lie(housing will always go up) and you know where it will end but hell you got yours before the end. The big sin in my mind is that they sold the above to Joe average who believed the bs on housing and bought that big house, spent the equity rise year to year and then ran their credit cards to max and are blamed for the crash.We all know that dishonnest companies like Enron, Golman/Sachs, Anderson, Rating companies etc. Seems to me we have been down this road once before and we called it the Great Depression caused by the same nonsense. We fixed it for 50 years or so by imposing regulations that worked till in 1980 they started dismantling the rules. Here we are again, same problem , same reason, same cures. The argument that these are differnt times requiring different rules is nonsense.

  • Central banking, under any name or guise, is a fraud. Always was, and always will be (as it has been run). With the exception of Hamilton, the Founders knew and understood this. Hey, the supposedly "smartest investor in the world" Warren Buffet, his daddy was one of the last congress people to rail against the fed. I'm sure that's how Warren made his money — playing the great fraud to his advantage. Don't expect anything to "change". The middle class and the upper middle class will be gone very shortly in America. Third world, here we come.