Nassim Nicholas Taleb on the Elephant in the Room

Professor Nassim Nicholas Taleb addresses the Annual Dinner in Hong Kong on Sept. 28, 2009. (Asia Society Hong Kong Center)

HONG KONG, September 28, 2009 - The global financial structure is in a more precarious state than a year ago, according to Professor Nassim Nicholas Taleb, author of The New York Times bestseller The Black Swan: The Impact of the Highly Improbable. As guest of honor at the Asia Society Hong Kong Center’s 2009 Annual Dinner, he told the audience of more than 600 people that, “A year after last October, we still have the same risks we had a year ago. Banks are as fragile as they were. As a matter of fact, they are even bigger and more liable to fail. The debt level is very high.”

Taleb was highly critical of the U.S. government's intervention after the unraveling of the global financial system in 2008. “What the government did was to allow the banks to get bigger. If they break now, we are in bigger trouble than before. The concept of bailouts is very vicious. Bailouts are bad because they fragilize the system.”

The financial industry didn't escape Taleb's criticism either. “Here you have fund managers hijacking society because they can take all the risks and when they break, they drag everybody down with them, but take the profit for themselves," he said. "It’s a socialization of losses and privatization of profits. It looks like we have the most vicious system you can think of."

Taleb was careful to explain that he was not criticizing all bankers. “A friend of mine has got a private bank. He only accepts deposits, never lends. He did the right thing and is being penalized now. I’m not against bankers, but against the hijacking of society by large banks.”

Taleb also singled out particular individuals (including Larry Summers, Ben Bernanke, and Timothy Geitner) for blame, observing that, “We had an elephant in the room—too much debt. Nobody saw it. Meanwhile there was a buildup of risks as people were sitting on dynamite. That kind of thinking led to the accumulation of a huge amount of risk in the system that these people did not see."

He noted that President Barack Obama had appointed many advisors who came from the establishment. “They don’t realize we have a fundamental problem with the structure of the system. That’s a messed-up system, over-dominated by theories that never worked, leading to predictions of overconfidence and a lot of debt."

Taleb concluded by warning of more pain ahead for taxpayers, if action isn't taken to correct the weaknesses he'd noted.