Larry Summers Takes Fight To Nassim Taleb At SALT 2014
Larry Summers, Harvard Professor and member of the White House National Economic Council during the financial crisis, went head-to-head with Nassim Taleb, author of The Black Swan.
Sparing no niceties, Skybridge Managing Partner and Founder Anthony Scaramucci jumped right in, asking Summers, “When you look at the global economic landscape, what do you like? What worries you?”
At this point, the panelists were still relatively calm but their body language suggested they were hostile. Summers eased into talking about how the fall of 2008 was much worse than the crash of 1929 and that today, the economy is much better off than it was in 1934.
Summers then argued that, “the lower bound on interest rates is going to be an important constraint on economic policy,” and, “I don't think it's plausible to think we're at the end of financial instability, even if we appear to have relatively low volatility.”
Taleb pounced on Summer's relaxed posture in his opening remarks, “When you have a crisis like we had, it was a very good painkiller to stop the bleeding, but it did not address the cancer.”
Taleb followed up with the solution, “We have a lack of skin in the game, greater than any point in history. My idea of skin in the game overlaps with what economists call moral hazard.”
“Today, banks are bigger. Too big to fail is worse than ever,” opined Taleb.
Before he could take a breath, Summers jumped in, “If you look at market values of equity, major financial institutions are much better capitalized.” Summers was very quick to point out to Taleb that things are better off and decisions were made to provide stability and restore confidence in the markets. He told Taleb, “The mistake is to not recognize that things were done to put the pieces back together. Right now, the increase in capital requirements, the increase in transparency will protect the stability of the system.”
Taleb retorted with historical context, citing government bailouts going back to his time as a trader in 1983. Traders in the 1980s called government bailouts “government puts” and Taleb argued, “The government put caused every bailout to get bigger. Everytime it gets bigger. Rates are at zero.”
Anthony Scaramucci, appealing to Larry Summers' side but trying to remain neutral, asserted, “there is no perfect solution,” to which Taleb responded, “To avoid systemic risk, you want to make the system more insulated, more organically able to handle crisis.”
According to Taleb, no one was hurt in the financial crisis. Those taking the risks were ultimately bailed out and then received major bonuses shortly after the crisis.
Summers told Taleb, “I think you way overstated the case that no one suffered in this last crisis. We shouldn't rest easy that the system is adequately failsafe.” Summers argued, “It's overstated when you say no people suffered.”
Continuing, Summers asserted to Taleb that, “the government has made money on their interventions,” to which Taleb responded, “These people are using the system. Two years after Lehman, you still had people running multi-million dollar derivative books with huge bonuses and tax payer money.”
Taleb said, “If an organization is bailed out, they're effectively civil servants. We can bail out organizations that are systemic and let ones fail that aren't.” Summers shot back, “We had that before 2008.” Taleb marched on, “Let's go back to when banks were boring and not taking too much risk.” He wants a system where banks are utilities and investment bankers take the risks.
A feisty Summers then said, “We need to have some factual discipline here. The idea that somehow what happened with Glass-Steagall is the cause doesn't hold water. The institutions that got in trouble weren't the ones that combined banking and investment banking. Lehman was not a bank.”
Taleb responded by reiterating that there needs to be skin in the game from the people participating in decisions that carry risk and that, referring to bailouts, the government should not be a sponsor of risk.
As the session neared the end, Summers simplified his plan for Taleb, “My plan is lots more capital, more liquidity, and procedures for handling failures of big banks.” He then simplified Taleb's plan by saying, “Your plan is the civil service financial system and the let it rip financial system.”
Taleb looked at Summers and said, “you shouldn't be able to get upside as a financial institution without the downside.”
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