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Coffee House

Nassim Taleb: Ban Tesco bonuses

12 February 2012

4:05 PM

12 February 2012

4:05 PM

There have been precious few people able to make sense of the crash. The main
commentators didn’t see it coming — and so have focused their energies stressing how no man born of woman could have predicted it. But Nassim Taleb did. He has been a voice of sense,
originality and common sense throughout, and David Cameron has been listening. The respect is mutual: Taleb even described Cameron as ‘the best hope we have left on this planet’ because
he understood the dangers of deficits. If CoffeeHousers haven’t come across Taleb’s books, such as Fooled by Randomness and Black Swan, I can’t recommend them
enough. I met him recently, and published the interview in this week’s magazine. As ever, with print, you have limited space — and I kept it to his thoughts on policies currently being
adopted by the government. But there’s plenty more. But for those who are interested, here’s a longer ten-point breakdown of his other arguments:

1) Hubris, then nemesis. Taleb was a trader for nine years, and saw enough of Wall St to be appalled by its hubris. Mathematicians, whose world is one of absolutes and certainty,
had taken over economics — which, done properly, is one of doubt. Guys at the banks — with their quant analysis and their computer models — thought they could eliminate risk. It
never works, says Taleb. We can predict eclipses, but never revolutions, nor the discovery of North Sea oil, nor war in his native Lebanon which had been stable for generations. This is what
happened in the Bubble Years: banks and governments were sure they had created a ‘great moderation’ (Greenspan) or the elimination of boom and bust (Brown), and borrowed massively.

[Alt-Text]


2) The QE deception. ‘Quantitative easing is a transfer of wealth from the poor to the rich. It floods banks with money, which they use to pay themselves bonuses. The banks
have money, and assets, so they can borrow easily. The poor guy, who is unemployed and can’t borrow, is not going to benefit from it… The state is subsidising the rich. It is the top 1 per
cent who benefit from quantitative easing, not the 99 per cent.’ Taleb rejects the idea that QE can be controlled. ‘It’s like a ketchup bottle. You try to pour money out of the
ketchup bottle: nothing comes out, nothing comes out — and then everything splashes. This is how it works. Inflation doesn’t arrive in a nice, manageable way, so don’t mess with
it. Every single person who has tried QE, or a form of printing money, has effectively lost the argument. Turkey had it, Brazil had it, Argentina had it, Italy had it when they debased the lira.
Even Weimar Germany claimed that QE made the government rich. There’s always an argument to print money.’ The Weimar scheme was not QE, as currently defined. I asked him if the
comparison was really fair. ‘Anyone printing money is trying a kind of stimulus with money they don’t have. You have this illusion that it is going to create growth.’ His point is
not that fiscal destruction is guaranteed, but that it can’t be ruled out. ‘We have a 90 per cent chance of seeing nothing and 10 per cent of having an explosion.’ And what might that
QE explosion involve? ‘Runaway prices. It has happened a lot in history. If you think you’re creating employment, you’re not.’

3) The danger of debt.
There will always be bubbles and crashes, Taleb says, and he’s all in favour of them. But what he’s worried about is scale. If a bank buys rival banks
(like RBS did) it becomes too big to fail. Then the free market ends: because the state has to bail out the bank. He loathes debt, because it scales up risk. And the bigger they come, the harder
they fall. He’s against anything getting too big, because they get fragile. His next book is about his notion of anti-fragility.

4) Positive Black Swans.
He says the opposite of ‘fragility’ is being too robust: robust things don’t respond to any surprises, good or bad. Sometimes, good surprises
come along. He didn’t mention it in our interview, but a good example is the discovery of shale gas. Our huge government has made lots of plans for windfarms, etc, on the basis that
we’re going to run out of oil. But in the last five years, shale has emerged as an energy source able to keep the UK going for 100 years. And what’s the UK government doing about this?
Nothing, because shale wasn’t in The Plan. Failure to respond to a ‘positive black swan’ is almost as bad as being blindsided by a bad one. Again, this is an argument against
scale: it takes longer to change the course big tankers.

5) Five Year Plans.
Taleb’s pet hate is five-year plans, because they are based on the false assumption that anyone can see five years into the future. He’s evangelical about
the dangers of false certainty, and the peril of believing computer-generated projections about pretty much anything. I asked him what, then, we should make of Osborne’s budget plan, which
lasts all the way to April 2017. ‘Bullshit,’ he replied with a smile. ‘Look at past five-year plans, how many have worked? It’s like someone getting married eight times,
each time thinking “this time it’s for love.”’ I asked him how long should governments draw their budgets for. ‘One year at a time,’ he says. ‘The error
margin for five years is monstrous.’ One-year plans were the norm before Brown came into the Treasury.

6) Cameron has been forced into a ‘Ponzi Scheme’. I asked him what we should make of a UK government plan to grow the economy by £100 billion but increase
national debt by £360 billion. The analogy Taleb reaches for is not flattering. ‘In any Ponzi scheme, there is great growth initially,’ he says. ‘Then you have to pay it
back.’ By his book, debt-fuelled growth is not real growth at all. But he’s quick to add that Cameron, having inherited one of the largest deficits in the world, had limited choices.
‘Debt may be necessary for a while, you don’t want to create great social disruption,’ he says.

7) Scale matters.
Taleb’s enemy is monolithic structures, and he thinks this is worse than a big state. This is what interests No.10 in particular: his intellectual (as opposed to
the practical or emotional) case for decentralisation, grounded in the Popperian logic of piecemeal social reform, rather than utopian top-down reform. He regards large companies as being
inherently riskier than smaller companies, and public policy (including competition policy) needs to take this into account. Which means that….

8) Tesco should be banned from paying bonuses. Here’s his argument: that that bailouts introduce the idea of unspoken government insurance — a very valuable policy, a
safety net being provided for free to firms deemed ‘too big to fail’. He argues in Black Swan that bonuses encourage managers to hide risk. So he’d draw up ‘a list
of companies that may be bailed out if they fail and you tell them you can no longer give bonuses so managers can hide risk.’ Being added to this list would encourage companies to slim down,
so their failure would not lead to a bailout. ‘If Tesco tomorrow was to fail, the government is going to have to do some bail out. So: no bonuses.’ That would force Tesco to cut down in
size, he says. I asked if this were an odd policy for a free society. ‘No, it is no longer free. A free society is one in which you are not harming others, but you are harming taxpayers. If I
have to bail you out, that is no longer capitalism.’

9) Size of government matters more than its structure. ‘Big government projects have horrible prediction errors.  Local things don’t, because prediction error is
compounded by size. If you double the size, you more than quadruple the prediction error.’ This isn’t an argument for privatisation, just breakup. ‘I don’t even care if it
is private or public so long as the unit is small.’ I mentioned to him Nye Bevan’s dictum, when creating the NHS, that a bedpan dropped in a hospital ward should echo around Whitehall.
‘That is the opposite to how it should be,’ he said. ‘If I am the head of a hospital unit and I fail, people will see me walk or go to church on Sunday. The disciplinarian is the
house of worship or going to the pub and running into your victims.’

10) Judge Cameron by his aims, not his actions.
Taleb’s comments on coalition policies — the ‘Ponzi’ debt, the ‘bullshit’ projections, the
‘illusory’ QE — seem pretty damning. But he says that Cameron ‘had no choice’ because of the mess he inherited. And he still very much believes in Cameron
himself. The two had a conversation recorded on YouTube (see here) which shows the level of their agreement. To me, Taleb puts his finger on
a major (and under-explored) aspect of Cameronism. He was elected talking about the dangers of debt — but ended up planning to borrow more in five years than Labour did in 13. Cameron’s
spirit was willing, but the Treasury’s flesh proved weak. But Taleb doesn’t hold it against Cameron. He appreciates how easy it is for ‘political philosophers’ like him to
describe the promise land. It’s a politician’s job is to work out how to get there. ‘I try to stay outside immediate debates,’ he told me. ‘I talk about the structure
that we should arrive at, not what should be done tomorrow morning.’ It could be that Cameron is following Brownite policies of five-year plans and debt toleration as a tactic, to reach a
Conservative (or, Taleb would say, ‘anti-fragile’) destination. We’d all better hope the gamble pays off.

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