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« BP Spills Coffee | Main | Greenspan Demands 'Tectonic Shift' Toward Fiscal Restraint, Says Deficit Is Top Priority, Compares U.S. Debt To Greece »
Friday
Jun182010

Taleb & Roubini Talk Debt, Indebted Grandchildren, & Double-Dips (Video & Transcript -- MUST SEE)

PBS News Hour Video:  Taleb & Roubini discuss the odds of a very lengthy recession -- June 15, 2010

Terrific clip from Tuesday night.  Have been saving it all week.  Transcript is inside.

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Have you already seen these:

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Source:  PBS

As part of his ongoing series of reports making sense of economic news, Paul Solman checks back in with two economists who remain pessimistic about the chances of an economic recovery to discuss recent market volatility and the possibility of a double dip recession.

PAUL SOLMAN: October 2006, here on the "NewsHour," Nassim Taleb warned of the fragility of markets well before the crash, before his cautionary book, "The Black Swan."

As I understand it, your central insight is that people underestimate the likelihood of rare events.

NASSIM TALEB, author, "The Black Swan": Exactly. And my idea is twofold, number one, that rare events happen more often, and, two, that, when they happen, they're far more devastating than we can imagine.

PAUL SOLMAN: A few weeks later, economist Nouriel Roubini took us on a pessimistic real estate tour.

NOURIEL ROUBINI, NYU Stern School of Business: Many people had no equity in their homes. Essentially, they had zero down payments, and now prices are falling, so they have negative equity. There will be lots of delinquencies, a lot of foreclosures.

PAUL SOLMAN: So, on the occasion of their new books, Roubini's "Crisis Economics," and a revised of Taleb's "Black Swan," we brought our doubty doomsters together recently at New York's Museum of American Finance to look back and ahead.

First, what was the reaction to their Cassandra turns on the "NewsHour"?

NASSIM TALEB: I had a lot of criticisms, because that was the first time I was voicing my opinion on national TV. And, so, I got a lot of hate mail at the time and a lot of criticism because my position contradicted the prevailing belief that the world moved into a permanent state of low risk, high growth, great productivity, and happy days.

PAUL SOLMAN: Did you get hate mail at the time?

NOURIEL ROUBINI: Not hate mail. Later on, I got hate mail. But people listened carefully, but they were highly skeptical.

PAUL SOLMAN: But the real skeptics were Rubio and Taleb, skeptical of the traditional economic model of markets.

NASSIM TALEB: I'm only coming to that -- to the game from the standpoint of fat tails, fat tails meaning the contribution of the rare event to everything.

PAUL SOLMAN: OK, a bit of explanation.

Fat tails refers to the two tail ends of the bell curve, the tails of the so-called normal distribution, which is used to depict human height, for example, height on the horizontal, number of people on the vertical.

So, most folks are average height, and there are fewer and fewer, as you work your way to teeny-tiny on the left tail of the curve to terrifically tall on the right. Markets were also imagined as a normal curve, most days, no real change, a small one-day loss happening maybe twice a week, same for a small one-day gain, a big loss maybe once a year, same for a big gain, a one-day crash, or jackpot, every million years or so.

That's why the tails are so thin. The extreme market-moving event is graphed as almost never happening at all. But small-likelihood events with huge impact happen a lot, says Taleb. The tails are way fatter than assumed.

NASSIM TALEB: The exception matters a lot. In economic life, it matters a lot.

PAUL SOLMAN: And, historically, it often has mattered.

NOURIEL ROUBINI: The trouble is that the average trader on Wall Street, he or she is so young, he doesn't even remember the recession of 2001, let alone the previous one.

And people are intellectually lazy. They think that, you know, normal times always with us to stay. But, as Nassim has pointed out, things that should be happening once every hundred years are becoming much more frequent, much more virulent. And the economic costs, the financial costs, the job losses, the income losses, the fiscal costs of bailing out financial system are becoming larger and larger.

PAUL SOLMAN: Case in point, the European debt crisis now roiling the markets and, say Taleb and Rubio, threatening the U.S. as well.

NASSIM TALEB: The risks of debt are monstrous. And now we're facing a future with even more debt. The only -- you know, the only hope I had was that someone would do to us what the rest of the world, Europe and the IMF, are doing to Greece.

No democratically elected government would take the right measure, would go through chemotherapy, would put its population through chemotherapy, which we need to do.

PAUL SOLMAN: So, has the tumor grown?

NOURIEL ROUBINI: There is now massive re-leveraging of the public sector. The U.S. today is having a budget deficit of $0.5 Trillion this year. That's 11 percent of U.S. GDP. That's not very far to the 13 percent of Greece. And U.S. is much bigger than Greece.

NASSIM TALEB: The U.S., we're facing $6 trillion in the next 10 years in the rosiest of scenarios. You agree?

NOURIEL ROUBINI: And the bond market vigilantes have already woken up in Greece, in Portugal, in Spain, U.K., in Ireland and Iceland. But, soon enough, they are going to wake up in the United States.

PAUL SOLMAN: You mean people who are loaning money to governments, buying their bonds, but who might demand higher interest rates because they say, I'm not sure you're going to be able to pay me back?

NOURIEL ROUBINI: Yes, exactly.

NASSIM TALEB: The governments have transformed private debt into public debt. Now, that's not something very commendable, because your grandchildren -- and I know you have grandchildren -- your grandchildren and their children will bear the price. This is immoral.

PAUL SOLMAN: So, what you're basically saying is, there were bad private promises of the past, mortgage-backed securities and all that kind of stuff; governments came in and made public promises, and thereby redeemed the private promises, and now we should be worried about the credibility of the public promises?

NOURIEL ROUBINI: Exactly.

NASSIM TALEB: Yes.

NOURIEL ROUBINI: Is never a free lunch. And, eventually, either you raise taxes or cut spending, or, otherwise, there are only two options, outright default or a capital levy through monetizing and I think an inflation tax.

PAUL SOLMAN: An inflation tax meaning there will be inflation, which is in effect a tax on your income?

NOURIEL ROUBINI: The real value of the public debt is going to be destroyed by the rise in inflation.

PAUL SOLMAN: And we will all be poorer.

NOURIEL ROUBINI: And that's like a tax. And everybody -- everybody who is a holder of public debt is going to have a loss.

PAUL SOLMAN: So, with unemployment close to 10 percent here, higher elsewhere, doesn't cutting off stimulus now, taxing people more and so forth, threaten to -- to end the upturn?

NOURIEL ROUBINI: Well, the economy is starting to recover. And if we raise taxes and cut spending, in the short run, there might be a slowdown in growth.

But, if we don't do it, the spreads on government debt are going to rise in a way that's going to crowd out the recovery and lead to a double dip. So, once that the bottoming of the (INAUDIBLE) that occurred and the recovery is starting, it's time to take away the stimulus. If we make a mistake of postponing it and keep on running larger deficits, we end up in -- maybe with the kind of financial disaster that Nassim is worried about.

PAUL SOLMAN: The kind of financial disaster that Europe is worried about at this very moment.

 

 

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Reader Comments (8)

If you look at history you see catastrophes strewn all around, from Stalin and Hitler to World War I and II in the 20th century, to the Napoleonic Wars, the rape of China by England and the U.S., the American Civil War and the Crimean War during the 19th century.

Marching back through history we see historical "black swan" events occurring quite regularly, and which include natural disasters, plagues and genocide. When you add these to the kind of economic and financial improvidence that Roubini and Taleb are worried about, things look even worse.

Those who try to warn people that they are running towards a cliff are called names but discounted.

Arthur Koestler said:

We, the screamers, have been at it now for about ten years.

We started on the night when the epileptic van der Lubbe set fire to the German Parliament;

We said that if you don’t quench those flames at once, they will spread all over the world; you thought we were maniacs.

At present we have the mania of trying to tell you about the killing-by hot steam, mass-electrocution, and live burial-of the total Jewish population of Europe.

So far three million have died. It is the greatest mass killing in recorded history; and it goes on daily, hourly, as regularly as the ticking of your watch.

I have photographs before me on the desk while I am writing this, and that accounts for my emotion and bitterness.

From Arthur Koestler, Wikipedia

Very few people believed Koestler and his friends, right up to 1939 and even beyond, well into the early 1940’s.
Jun 18, 2010 at 7:06 PM | Unregistered CommenterJames Street
Good post James S., yet still to this day, you hear kill those people, or those people, even here some have clearly stated their intentions. Following these "black swan" events alone prove there is no evolution, only de-evolution.

Society cannot march forward, only backwards...
Jun 18, 2010 at 7:55 PM | Unregistered CommenterS. Gompers
Both Taleb and Roubini are basically optimists but they function within the American advertising society where every product, including all news and politics, is put in a perspective that flatters the powerful who are the corporate owners and directors.

We are so used to this in America that any other way of seeing things appears radical, communist, atheist, liberal .....

It is not much different in other societies. Most people in all societies rush to the center and huddle together seeking safety in numbers and conformity. The most insecure among them function as gate keepers whose job is to identify the enemies of the group, to out them and to destroy them -- usually not by literally killing them of course. This way they curry favor with the more powerful members of the group and get the scraps from their tables. This was what Mao meant when he called them the "running dogs of capitalism." Unfortunately a similar process evolved in China under Mao.

The American economic system and its members function in a similar way. They have their own rituals and beliefs which are are taught in universities and colleges. Practitioners are anointed by a handful of prestigious graduate schools and everyone else is either an outsider or a gatekeeper. They call economics a science but it is simply a set of prejudices based on false premises, such as the definition of homo economicus.

Economists usually define homo economicus as a rational, perfectly informed and self-interested actor who desires wealth, avoids unnecessary labor, and has the ability to make judgments towards those ends. (See Wikipedia)

However,

Marx thought economics all came down to class warfare.

Freud thought all life was was a battle between reason and irrational instinct.

Thorstein Veblen thought economics was based on the need of the leisure class to prove its superiority over the rest of us by conspicuous consumption.

Francis Edgeworth, following Jeremy Bentham, thought human beings were pleasure machines and economics was the study of the maximization of pleasure by individuals. And yet he lived a completely ascetic life.

Adam Smith said, unexpectedly, “To feel much for others and little for ourselves; to restrain our selfishness and exercise our benevolent affections, constitute the perfection of human nature”

Alexander Hamilton asked, rhetorically, “Why has government been instituted at all?”

And he answered, “Because the passions of man will not conform to the dictates of reason and justice without constraint.”

Elias Canetti opined “There is no doubt: the study of [human behavior] is just beginning, at the same time that his end is in sight.”

The Buddha said,

All life is suffering
All suffering is caused by desire
Suffering is ended by ending all desire.
Desire is ended by following the 8-fold path to virtue.

It all depends on your point of view.
Jun 18, 2010 at 9:15 PM | Unregistered CommenterJames Street
Government Expanded 'Like a Cancer': Marc Faber
http://www.lewrockwell.com/faber/faber69.1.html

Refusing to Be Counted

by Vijay Boyapati
I also endeavored to explain that, contrary to the widely believed canard that the public school system was instituted to educate America's youth, early proponents of public schooling openly admitted that their true purpose was to forcibly inculcate children with an abiding devotion to the state. As Edward Ross, a progressive sociologist, wrote in his 1901 treatise Social Control: A Survey of the Foundations of Order,
http://www.lewrockwell.com/orig11/boyapati2.1.1.html
Jun 18, 2010 at 10:01 PM | Unregistered Commenterken
Most sane people aren’t libertarians when its comes to things like forced vaccinations and other medical policies that are necessary for public health. Pure libertarianism doesn’t exist, in that sense, except among religious fanatics.

The same is true when it comes to various economic and political policies which seem necessary for social health, like government controlled police, fire and military forces instead of privately owned and controlled defense forces. I don’t know of any libertarians who advocate the complete abolishment of government in that sense.

Intelligent people argue about whether roads, schools, health insurance, drugs and other things should be controlled by the government but no sane person believes there can be no argument about any control, and that he is right about each case and everyone else is wrong about each case.

The real question is whether or not people follow their principles (libertarianism, socialism, Liberalism) or only hide behind them and use pure expediency to attain their ends.

Often expedient behavior consists in pretending to have principles when you have none. It confuses your enemies.

Libertarians can always claim the right to change their minds, when their circumstances change, about when government should effectively intervene but if they can’t find good reasons for changing their minds, reasons that are consistent with previous reasoning, then they are either incompetent fools or lying rogues.
Jun 19, 2010 at 12:35 AM | Unregistered CommenterJames Street
james... i enjoyed the history lesson on Koestler...thank you...
Jun 19, 2010 at 1:13 AM | Registered CommenterDailyBail
Oddly enough, Koestler was a very popular writer after the war but now is almost completely forgotten. Even so, I highly recommend almost all of his books. They are still relevant, intelligent and instructive.

Darkness at Noon is the most well-known of his books. Ironically, Darkness at Noon made Koestler famous and earned him a loyal readership throughout the postwar period even though the people it was intended for, the communists, mostly ignored it or called it heretical. (It was written during the height of Stalin's purges.) Cold war, anticommunists, especially in America, latched onto it as a propaganda piece to put on their coffee tables but not read.

Koestler had a difficult personal life that ended in suicide. He seems to have been a womanizer raised to the second power which a lot of people, and especially women, still can't forgive him for.
Jun 19, 2010 at 1:40 PM | Unregistered CommenterJames Street
@ James Street;

I LOVE reading your posts! Thank you.
Jun 23, 2010 at 4:01 PM | Unregistered CommenterRecoverylessRecovery

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