Transcription
Well, the whole combination, big government, a big central government, was a big, you know, uh, bailing out authority, coupled with a huge number of regulators who don't have a clue, and who eventually are indirectly on a take. You know, because, um, you know, in Africa, you see people have outright corruption where I, you know, give you diamonds or something. Whereas in Washington, you have this, um, implicit, uh, you know, corruption. I call it the Tony Blair problem. The Tony Blair problem is, you do a good job, and then you're going to go be able to work for $5 million a year at Goldman Sachs. So whatever you're going to do as a regulator is going to be there to either facilitate your job at Goldman Sachs or make regulations complex enough to make yourself necessary later on. And we have evidence of that.
You know, going, what people fail to understand, and this is where libertarians tend to pick it up rather quickly, is that even when you read Adam Smith, you have this illusion that the economy functions like a machine. It's not like a washing machine. A washing machine needs maintenance. It's more like a cat than a washing machine. The human body needs some stressors, and everything, uh, organic and complex communicates with the environment via stressors. Mhm. So it's the opposite of Nietzsche. What doesn't kill me makes me stronger. I make claims: what kills me makes others stronger. That's right. Because they learn from your mistakes, and you have evolutionary forces where the individual sacrifices for the collective. And it works within your, your biological system. Even at the cell level, cellular level, you have your, you're composed of cells. If you harm some cells, you see your overall health will improve. A good antifragile system is a system in which all mistakes are good mistakes. Right? You see, and a bad system is one in which, as again, to paraphrase Yogi Berra, you tend to make the wrong mistakes, right?
So, let's compare the banking system, uh, uh, to say, uh, transportation. All right. Every plane crash makes the next, uh, plane crash less likely, and, and, and our transportation safer. Now, with the banking system, it's because of, you may blame it on government. I do blame it on government, but it could be some, something else.
Wait, did you say you do blame it on? I do sort of blame it on large government means large banks, too big to fail. The failure of a bank leads to an increased probability of a failure of the entire system, and that's a bad system. The way I, I present things is, is, is overall, I say, what, what fragilizes an overall system? What did that fragilize our system? Three things. Number one, uh, centralization. Decentralization spreads mistakes, makes smaller mistakes, like Switzerland, perfectly decentralized and smack in the middle of Europe. So decentralization, which is where we converge with libertarians. A second one is, uh, low debt. Mhm. Because we've discovered since the Babylonians that debt has systemic, uh, consequences, whereas equity, you know, doesn't have. So the second, so idea is debt. And the third one I will say is skin in the game.
So let's talk about debt. Debt leads when you to fragility because let's say that you have two brothers. One of them borrowed, and, you know, they both have provisions about the future, forecasts, uh, predictions about the future. One brother borrows, the other issues equity. The one who borrows will go bust if he makes a mistake. The one who issued equity will fluctuate but will be able to, you know, survive forecast error.
But is it also true that the brother with equity can never really have that big payday? For him, but overall for the system, you see, the thing is, well distributed, you know, there's an account in equality. So what you have is debt. Traditionally, debt has blown up systems and has been very good for governments to wage war, you know, that's typically. But and I'm not against credit, I'm against leverage credit. You know, letter credit is what made commerce possible. Most of banking started mostly, I trust you. You're going to go to Aleppo, Syria, and I'm in Florence, and you're going to send me some silk, and you trust me. And then I give you some money when silk, and then my correspondent in Aleppo would pay you the minute I get my silk. That kind of transaction. So that's called letter credit, you see, where you have like debt conditional on some commercial transaction being completed. Okay. And it allows, uh, also allows people to finance some inventory, provided the buyer is a committed buyer. That kind of facilitation of commerce is how it all started, the letter credit, and developed very well. Before that, we had debt in society, and it led to, uh, blowups in, um, in, uh, Babylon. And then they had to have debt jubilees. And then, of course, the Hebrews also had debt jubilees. And then, of course, neither borrower nor lender shall be, in the separent. You can see that the, the, the, and then you had the Romans didn't like that. The Greeks sort of didn't like that, except for a few intellectuals, for some reason, like Mr. Krugman, like that. And then, of course, um, later on, debt came back to Europe as a reformation, and it was mostly to finance, uh, wars. The industrial revolution was not financed by debt. California, you told me that you read my book on a on a Kindle or something like that. It was just not financed by debt, financed by equity. So, so, um, so debt is not necessary. I mean, it's, you can use it for emergencies. And, uh, and of course, we have, you know, a lot of societies. Catholic societies, you know, Aquinas was against that, and his statements were stronger than the Islamic fatwa against that. So just to tell you that we have learned through history that these things, debt as leverage, formal leverage, can blow things up. So this is where debt fragilizes.
Now, what we have had, of course, in this economy is, uh, uh, growth of debt, mostly financed by indirectly by governments, because you blow up, you know, we're going to be behind you. And the game became sort of like the mode. And then, and, and but you cannot separate the three, right? Large government. You cannot separate it. It's inseparable. The third point is skin in the game, right? When you're a banker, all right, and you have the upside, no downside, what are you going to do? Create the maximum number of loans that don't blow up often, right? And collect your bonuses. Mhm. It's like selling an out-of-the-money option, and then of course, you blow up. Now, how do I link this to fragility? It's very simple. Fragility is short volatility, you see. And selling an out-of-the-money option is short a certain class of volatility. And what you have is a banker has the option. He has the upside, and you have his, if you pay taxes every April 15th, you're paying for his downside. Okay, that's it. All right. They may make money, you still cover his downside. So this is, this to me is not capitalism. It's misunderstanding of basic rules and skin in the game. You know, it started with Hammurabi. It led later on to an eye for an eye, and led to the golden rules, right?
The, what, you know, we know. I mean, I work on Wall Street. I work everywhere. You have, um, a lot of, uh, uh, forms of, um, asymmetries that are not visible to the public corporation, right? You start, you own the corporation, and then, you know, you go public now, and then you sell it to some manager. Now, a professional manager's aim is to look good so he can collect the bonus. He doesn't really care about the intrinsic health of the corporation. Mhm. Uh, in banking, of course, you know, bankers, we bailed them out. Then banking, I wrote on the Black Swan, I got so many letters asking me to prove it because people didn't believe it, and also bankers, of course, didn't like my book. In 1983, by 1983, last quarter of 1982, banks lost more money in, you know, money center banks that quarter than they made in the history of banking of money center banking. And, of course, we bailed them out. So we started the mode under Reagan, right? And, and of course, later on, Greenspan made economic policy.
You referred to Greenspan as the fragilista. Fragilista. Exactly. But it's not just Greenspan. There was a fragileista. It was a system that bailed out banks, nationalized Continental Illinois, and then suddenly, you know, allowed these asymmetries to prevail.
Well, the whole combination, big government, a big central government, who is a big, you know, uh, bailing out authority, coupled with a huge number of regulators who don't have a clue, and who eventually are indirectly on a take. You know, because, um, you know, in Africa, you see people have outright corruption where I, you know, give you diamonds or something. Whereas in Washington, you have this, um, implicit, uh, you know, corruption. I call it the Tony Blair problem. The Tony Blair problem is, you do a good job, and then you're going to go be able to work for $5 million a year at Goldman Sachs. So whatever you're going to do as a regulator is going to be there to either facilitate your job at Goldman Sachs or make regulations complex enough to make yourself necessary later on. And we have evidence of that. If you don't let things fail, you're going to have concentration of mistakes, right? You see that plus asymmetry doesn't work very well, plus risk hiding, where you have regul, I mean, I, uh, was spent 20 years fighting something called Value at Risk, mhm, that was, uh, mandated by regulators and allows people to hide risk in the tail. It's not, it's so to me, when you have skin in the game, it solves so many problems. People are harmed first by, you know, by their own mistakes, just at the level of a bank itself. All right, so we don't bail out banks here. We're bailing out individuals with through these, uh, uh, securitized mortgages. But just take a level of a bank. Bob Rubin made $120 million stuffing, helping to stuff City Bank with risk, and his boss made even more. Um, and then they blew up. We're paying for it. And bankers even spat in our face by paying themselves in 2010 higher levels of bonuses than ever in history. All right.
So, so, so how do we solve it? Very simple. I have rules. I don't, I mean, I don't believe in nationalization, but I believe as a taxpayer, I would like if a, I would have a list of banks, all right, uh, well, I mean, decentralization solves the problem, but if you don't have decentralization, have a list of institutions in this country, all right, if they fail, would be a national emergency to save them? Yes. No. If the answer is yes, you call them up, you tell them, effectively, as of tomorrow morning, 9:00 AM, you are, you belong to the taxpayer. Right? The taxpayer should be able to set your bonuses. Okay. You see that way, you don't have this, uh, you know, warped incentive.
Who is who is making that list? I mean, it would be, whoever, I mean, it would be the taxpayer, whoever pays taxes, government, whatever, however you want to call it, you know, I mean, government for that, but saying, we cannot bail out a company. All right, de facto, they're civil servants. You see, so we have to decide on their bonuses. So what would it do? It would force corporations to be small enough that they wouldn't be on that list. Right? That's one form.
Another one to solve associated problems would be what I call the Tony Blair rule. The Tony Blair rule. You cannot go work for the government. Mhm. And ever later on, right? Have an income higher income than what you earned in debt for inflation and without paying it to the taxpayer. Why? Because I don't want the regulator to go make something, right, to to complexify his stuff to go make $5 million for Goldman Sachs. Go work for Goldman Sachs. Now, these are heuristics. I come up with simple heuristics, and you want to come up with heuristics that, you know, are not perfect, but very applicable and solve complex problems without having side effects. Okay. And to me, the, the, it's very important to have these heuristics, and it would that would clean up Washington. If you have sufficient rule, you want to work for Goldman Sachs, go work tomorrow for Goldman Sachs. Don't go work, you know, after your career. And so it should be that working for Washington should not be an investment strategy. Right? So that would automatically control the.
There's something called the island effect. And the island effect in nature, uh, is as follows. An island will have a much higher number of species per square meter than on a continent, and it's actually proportional to the square of the area. Yeah. So it is shockingly, um, robust, you know, across. So we've lost the island effect. Now you have Google dominating the whole planet, stuff like that. It's not a problem. The thing is, if we stop letting these firms fail when they become ill, right? And they can get large enough to to dominate government. So the problem is if you let them fail. Now, computer firms, I'm not worried about.
Why are why aren't you worried about computers? Because, uh, you know, they're, um, it's a competitive environment. Google is, I mean, we can see the end of Google, on the end of Google. No difference. No difference. No difference for you and I. If Google fails tomorrow, or there'll be something else. Don't worry, it's not like it'll be dramatic, and the government won't save them. Okay? So, and I don't think they'll fail because for that reason, given that they know the government won't save them. But if you have, so you can have some centralization, concentration, that's not the problem. The problem is we have had in almost all Western countries, uh, uh, nominally they say decentralization, decentralizing, but but but effectively they've had more and more power to the government, central government, like the United States. Okay.
So you want decisions to be spread out. Now, government debt is a result of centralization and typically the cause of more centralization. It's a very bad circle, right? You see government debt. Now, most of the debt now is transferred to the government with a small number of people calling the shots, and some fellow, you know, with a beard who sort of looks like me, but I hope not too much, is printing like there was no tomorrow. He has no clue. All right.
Why is that? And yeah, why why is that not isn't that exactly what we need though? We need a monetary stimulus because. I don't, I don't understand this, this. I understand what I understand is that the mistakes coming from that can be monstrous. Mhm. The point is, is, is that you need to look at risks of things. You see, some planes may go faster, but but you wouldn't, you know, want to be on them because they're going to crash, right? You see, we got to look at things with a risk, uh, uh, adjustment standpoint, or the risk vision.
There's another thing about, uh, skin in the game. Uh, bureaucrats don't have skin in the game. They have spreadsheets looking at them. A local government people are much more responsible for deficits. But the real cause isn't the smallest beautiful argument. The real cause is what I explained here. Everything comes back to volatility. When you're large, you get to be short volatility. Why? A 100 million pound project in the UK tends to cost 30% more in overruns and problems than a 5 million, uh, pound project. So you have, uh, uh, you know, these errors scale faster and faster, and that is bad for.