Capitalism 2.0 or Collapsonomics 1.0 ?

Nassim Nicholas Taleb (writer of the excellent "Fooled by Randomness" and misleading - imho anyway - "Black Swan" * has an excellent piece in the FT about the problems with how the banking and financial system is (not) being fixed - expurgated version below:

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.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. It is irresponsible and foolish to put our trust in the ability of such experts [the financia experts of today] to get us out of this mess. Instead, find the smart people whose hands are clean.

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”. Bonuses do not accommodate the hidden risks of blow-ups.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches.

I honestly do think most people would come up with a list something like this, but what is good about this piece is that Taleb is an ex-trader as well as being fairly good at maths , so has the necessary gravitas and gets into the FT with it. The scary thing is that virtually none of these have been enacted in the UK.

As he notes, the solutions are not hard - but are hard to do given the power structures:

Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

Amen to clawbacks, I think that would send a message that would reverberate for generations. Right now there are a lot of wealthy, irresponsible people out there who have been well rewarded for their activities, and that cannot be good for trying to "nudge" better behaviour if everyone knows that the minute the world's back is turned it can all start again.

The failure to address this will result not in Black Swans though, but in the Black Elephants* of Collapsonomics

Question for us Web-heads, is how can we use the new technologies to force the hand of Them to change the path they are still on, as the macro-economic path we were on was - and is - unsustainable.

*My beef with Black Swans is that many are in the "so what" variety, and even if huge and relevant, in most cases in my experience you cannot stop doing something in the very unlikely event that something very nasty will happen (tiny probability of large building collapse cannot prevent opening of coffee shop next door etc) . What is more scary is when the problem is big, nasty and very likely and still no one wants to deal with it, ie its a "Black Elephant" in the room. I think the notes above are describing that sort of situation.