Black Swans, Bailouts, and Nationalization

In the fascinating Black Swan by Nassim Taleb, the author describes how the economic theories on which our current society are based are flawed to the core because they are based on the idea that everything is always entirely predictable at all times, and anything exceptional is limited and can be largely disregarded.

    Chained by fetters of self-deluding formulas and mathematical equations, these ivory tower theorists, Taleb contends, are ignorant of the realities of the world, which consists of a long series of unexpected events that only a flexible mind has any hope of dealing with, rather than one that is narrowly confined to a channel suggested by neat but very dogmatic theories.  Dramatic events like earthquakes requires earthquake kits for you to be ready for them. 

    Yet, these same economists are extremely powerful in the modern world and decide the fate of nations, dragging the rest of us along into disasters they are not prepared for because their theories cannot encompass the idea of sudden, unexpected change. Taleb scathingly attacks their scientific method as a straitjacket which confines them to a very limited range of pre-programmed responses, based on past events rather than what is actually happening in front of their eyes.

    In light of the economic blows that have battered the United States over the past ten years – and to a lesser extent, for the past thirty years – it is difficult to contest Taleb’s general premise. He presents a striking case that economic theory has become a helmet with no visor, blocking economists’ view of reality while they try to manipulate an actuality they cannot actually see.

    Despite its use of humor and anecdotes, Taleb’s book is not an easy read in places, thanks to both abstruse terminology and occasional forays into fatalistic pessimism which are hardly the way to find a solution to problems. However, Taleb’s insights more than make up for this – as, for example, his thoughts about the recent economic bailouts and nationalization.

    Taleb points out that as many industries as possible should be made up of small to medium sized companies that operate in free market competition, and stand or fall on their own merits with no government intervation. However, if something really is too big to fail, he says, nationalization is the only answer.

    Before your hackles bristle overmuch at this, you should also consider his conclusion – that the only alternative, since Black Swan events will inevitably show up with huge, complex organizations – is to let these organization take over the government, which is essentially what has happened with countless billions of dollars being given to the very banks that caused our current crisis, with no strings attached to these taxpayer gifts. Emergency Preparedness of banks have become our unelected rules, and as Taleb points out, it is better that the banks should become property of the nation than that they should become its dictators.