Black Swan' Author Taleb: Stimulus Made Economic Crisis Worse

http://www.bloomberg.com/news/2010-09-25/-black-swan-author-taleb-says-obama-s-stimulus-made-economic-crisis-worse.html

by cwan • 16 years ago

27 41 16 years ago

ruang• 16 years ago

I always felt that Soros was better than Buffet but could never adequately explain why. I like Nassim's explanation that since Soros made more decisions, his outcome is less likely due to luck.

In other words, the more your ability is tested, the more likely your results are closer to the expected value as randomness negates itself out.

allengoodman• 16 years ago

His characterization was interesting, but I'm not sure if I agree. Since the crisis, Warren Buffet acquired 10% perpetual preferred stock of Goldman Sachs, invested $2.6 billion into Swiss Re, and acquired Burlington Northern for $24 billion. Three deals, each of which was different in composition, cost, and market. Moreover, I suspect each will be success and none wholly initiated by a "certain earnings profile." Nonetheless, while I think the comparison is meaningless, the underlying logic is intellectually attractive.

chrismealy• 16 years ago

In Buffett's early days (when he was returning over 30% year after year) he did lots of arbitrage. He mostly got out of it in the 1960s. Taleb probably doesn't know about that.

rubashov2• 16 years ago

> Canada has the lowest ratio of net debt to gross domestic product among the Group of Seven industrialized countries

If we're including household debt this does not square with what I've read elsewhere.

p.s. I've immensely enjoyed various sharp screeds from recent years ripping Taleb a new one:

http://scottlocklin.wordpress.com/2009/07/17/nassim-taleb-cl...

http://falkenblog.blogspot.com/search?q=taleb

lukestevens2• 16 years ago

Those Taleb take-downs are well worth a read. Taleb makes for good media soundbites as a contrarian; but to me it seems more like anti-intellectualism for the educated. I'm not sure why he deserves that platform he apparently has.

From the first piece: "So why do people listen to this guy? Part of it is doubtless the “famous for being famous” effect. Taleb is witty and clever, and ruthlessly promoted himself as a public figure after his trading days were over. Not a bad strat for success in the modern media culture: grab the megaphone and declare yourself a genius. Everyone wants to think they’re more of a mental bigshot than the eggheads who run things. Plus, it’s not like Jim Simons has time to write Financial Times articles. He’s too busy making money more or less proving people like Taleb wrong."

kiba3• 16 years ago

I dislike pyschoanaylsis. They're really neat explanation but they're well, lack explaining power.

Plus they don't do much for learning about the truth, and they're more about attacking a person's character.

patrickgzill• 16 years ago

My view of Canada is that they have a large amount of natural resources, some even renewable natural resources, on a per-person basis. The USA has a large amount of natural resources as well, however, 10 times the population to spread it amongst.

rubashov2• 16 years ago

A bet on Canada is a bet on the commodities markets, plain and simple. Canada is fucked if Bob Prechter is right. Canada does great if Jim Rogers is right.

kiba3• 16 years ago

I have no ideas what those people are talking about in some of their arguments. However, I'll keep the allegation about Taleb in mind.

sbaqai2• 16 years ago

"[Soros] made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy."

I don't buy that. Even the shallowest read of Buffett's investment history, you'll find he's always followed a very concentrated portfolio strategy. He waits for the fat pitch, and loads up when an opportunity comes along. He's mentioned that if you were to take away his top 20 best investments, Berkshire would have a pretty average record.

Does Taleb believe more decisions increase the likelihood of reverting to the mean (ie: average returns in this case)? And by that logic, Soros has made more decisions, so that must suggest its less random, and more talent? This is a classic case of man with a hammer syndrome.

By only deploying capital when the odds are disproportionately in your favor, you are LESS likely to make errors. The less decisions, the more deliberate your actions are. Inactivity isn't a measure of luck.

kragen2• 16 years ago

If you have a hundred would-be Warren Buffetts who each make one investment per year, and a hundred would-be George Soroses who each make dozens of investments per year, the variance on the Buffetts' investments will be a lot bigger than the variance on the Soroses'. Consequently the richest investors out of the whole group will almost certainly be Buffetts, even if the two groups do equally well on average. In fact, the average of the Buffetts has to be quite a bit worse than that of the Soroses in order for a Soros to come out on top.

That's the argument Taleb is making: that Buffett's success is weaker evidence for the expected return of his investment strategy than Soros's success is for his.

Taleb is correct. If you think he's wrong, you don't understand his argument.

Now, you (and Buffett and Munger) argue that there's an additional reason to believe that Buffett's strategy is a good one: because fewer decisions means that each decision will be smarter. Well, you could be right. Historically, though, human beings are pretty bad at distinguishing good investment strategies from bad ones by logically analyzing their premises. So the statistical evidence Taleb is discussing counts for more, in my book.

sbaqai2• 16 years ago

I understand what you're saying. But don't you have to consider the number of times Buffett exercised his investment decision, and not only when he's put money up?

You'd have to consider all those deals he passed up, as using his investment strategy, no? He may make 1-2 investments a year, out of maybe 200 investments available to him that he's analyzed. Thats still 200 investment decisions, not 1 or 2, which I'm assuming Taleb is using.

Wouldn't a thorough analysis consider four possible outcomes? The first event is the decision to invest (Y/N). The second event is whether their decision worked in their favor (+/-). (Y+, Y-, N+,N-) Y+ and N- are successful use of strategy. Y- and N+ are failed strategy. Same for Soros.

Example: Consider all of the investments that were passed up, that would have been terrible investments. That could be considered successful employment of an investment strategy. Buffett inherently (based on his style and risk profile) has a larger proportion of these.

kreneskyp• 16 years ago

The initial point of the article is faulty. The federal government was running a deficit before the bailout and stimulus bill. These bills were deficit spending, something you can't do to pay down the debt.

fauigerzigerk4• 16 years ago

When a patient has heart failure, you try to stabalize him first. You don't immediately put him on the operating table to do stomach reduction surgery in order to combat the obesity that caused heart failure.

lzw7• 16 years ago

Bad analogy. Here's a better one: When a patient is dying of blood loss, you don't continue to put more leeches on and make charts showing how his cheeks will be rosy if only we add more leeches.

The "stimulus" destroys jobs, it is a leech on the economy.

Experimentalist2• 16 years ago

How about this:

When a blind fat man gets depressed, you console him first. You don't immediately put him in a go-kart with a fistful of antidepressants,a bottle of gin and a sword in order to combat the lack of euphoria that caused the depression.

fauigerzigerk4• 16 years ago

No, your analogy is bad because it ignores timing and that's what it's all about. Shifting debt around to buy time can make sense. It's what we do when we refinance expensive credit card debt replacing it with a cheaper bank loan.

The government can borrow at 2.5% for 10 years. It can buy time that indivuals or banks cannot buy. If that time is used to let the economy recover a little and then make structural reforms to reduce debt, the idea can work.

drallison2• 16 years ago

I think Nassim is standing on shaky ground here, although we do not have the full text of his remarks.

I do not think our understanding of real world economics and the way that our economy actually works is adequate to state anything about the impact of one strategy versus another. Academic Economics certainly is not adequate to predict anything in the real world with any degree of reliability. Time series analysis of indicators does not provide insight into the causes and effects of complex events. No one seems to be trying to model the impact of various strategies and compare them to observations.

Policy makers really need better, experimentally validated tools to help them make decisions. We need an experimentally verifiable model that allows rational comparison of strategies. It would be nice to have some experimental validation of the belief systems of the current economic pundits. Me, I doubt that the unfettered free market economy can deliver what is promised.

Without better understanding, we will continue to fly blind, waste resources, and make sub-optimal decisions.

fauigerzigerk4• 16 years ago

How do you imagine experimental validation in a macro economic context?

Locke1689• 16 years ago

This is what makes this not Hacker News, in my opinion.

lzw7• 16 years ago

I would like to point out that the understanding of real world economics is developed enough to make very accurate predictions.

For instance, I knew in late 2000 or early 2001 that there would be a housing boom, a housing bubble, and a banking crisis when it burst. I was a slacker so it wasn't until 2003-2004 that I started putting money behind this scenario and I profited on the way up and on the way down. (I was way too conservative in retrospect.)

I applied economic principles (and not my own genius, I just knew who to read) with real money and profited greatly as history unfolded as predicted.

The school of economics that told me about this upcomming bubble and predicted it using the same theories they have used for nearly 100 years is the Austrian School, and you can learn more about them at http://mises.org.

I know much of what is presented in mainstream media, the NYT and in many college courses seems complicated to the point of uselessness, and certainly we had Bernanke and Greenspan both claiming there was no housing bubble, even when it was well on its way in 2006-2007.

It is not that economics is so very complicated, it is that these people have a vested interest in pretending like economics is unpredictable. Their interest is in unlimited government spending, and so they constantly talk about deflation (never a real fear) to justify an inflationary policy which is also known as "letting the government spend whatever they wish to buy votes and gain power."

Of course you doubt that an "unfettered" free market economy can deliver what is promised because you've never seen one, and instead all your life you've seen government interventions result in disaster, and then said disaster being blamed on "free market principles". Like california, which banned the generation and sale of electricity in the state blaming "deregulation" for the energy crisis. Complete with well orchestrated ENRON show trial.

It is not ignorance that causes these suboptimal decisions, it is poltiicians putting one over on you.

FWIW, the Austrian Schools predictions go back many years, including accurately predicting the great depression, the fall of communism-- not just that it would fall, but how exactly it would fall and why-- 70 years in advance, etc.

I believe the ability to make predictions is the mark of a science.

I shouldn't care that most people buy the government nonsense that economics is "just too complicated"... because I am able to profit from the ability to make these predictions.

But I see so many lives destroyed by this, and needlessly, deliberately, by people who are either extremely ignorant, or dishonest, that it drives me up the wall. (And so I post here, knowing that I risk being downvoted into oblivion, not for failing to provide a wealth of information or a relevant perspective, but for not goosestepping along with the party line.)

As long as you believe it is impossible, you won't hold them accountable when they cause disaster.

I can predict the next two bubbles... they are already well under way. The bond market bubble is the next one to pop. I expect we'll have a crisis in some form before the end of 2012, though timing is hard to predict. The question is, how are they going to inflate their way out of that one-- because the prime candidate for the crisis is a failed bond auction. (The fed appears to be printing money and buying at its own treasury auctions already to keep them from failing... this is hidden, but the clues are there, and as a result, buyers are getting wary...who knows when they will be spooked.)

AT some point after that the next bubble- the bubble in the value of the US dollar, will burst. We'll have hyperinflation, most likely, unless our government takes as sharp turn towards responsibility.... but how long that takes to play out is unclear. What is clear is that we have benefited from exporting our inflation for the past 70+ years, under Bretton Woods and other agreements, and this was viable so long as we were a major exporter, and our government was solvent. But the soverign debt crisis sweeping europe right now is hitting countries whose (real) debt to GDP ratio is similar to ours or lower--- and our debt is growing at an unprecedented clip.

It is not hard to make predictions, even with some understanding of the timing.

Economics works. The problem is what is passed off as "economics" in popular culture is, most of the time, simply political ideology pretending to be economics.

waterlesscloud• 16 years ago

I voted you up, even though I don't know that I agree with your coming predictions.

But I've been thinking about a similar topic tonight, as I read columnists and reporters talking about how complex financial instruments are these days and how no one really understands them. Because the basics of them aren't all that complicated. CDOs, CDSs. ETFs, whatever. None of them are particularly complex concepts. Anyone with a CS degree has mastered concepts many times more complex. I accept that the details get tricky, but the details of lots of things get tricky, and a lot of people make solid livings being responsible in managing tricky concepts. None of these financial instruments are magic. I'm a curious layman, I get the gist of all of it.

And then there's people who claim their variable rate mortgage was too complicated to understand. Come now.

So I was thinking that it's really just in everyone's interest to pretend this stuff is hard to understand, that it's complicated, that it's magic.

Because then no one is responsible.

And then, as the saying goes, was I enlightened.

The housing bubble was easy to see. Everyone saw it. Many, perhaps most, ignored it. Because they wanted to. It let them gamble and not be responsible. From Joe Homebuyer to James J. Investmentbanker IV.

Some things are complicated, sovereign bonds and currencies among them. There are many reasons that nearly all the powers that exist want to keep that music going, and they have many tools at their disposal. I honestly don't know what will happen there, which is why I'm not sure I agree with your predictions in those areas. There's real magic at work there, and it's one of the few areas where make-believe becomes reality. The US has a very strong hold on centrality in the global economy, and I can't see how it's cleanly broken without severely damaging anyone who has the power to break it. That's the magic part.

Experimentalist2• 16 years ago

Taleb's criticism of methodology in economics echoes Austrian criticism of economic engineering and the various mainstream economic models.

For example, in the Black Swan, Taleb mentions Hayek, the Nobel Prize winning Austrian school economist.

When asked about a Feyerband comparison (by reporter Felix Salmon, Taleb emailed "to say he considers himself closer to Hayek than to Feyerabend"

http://blogs.reuters.com/felix-salmon/2009/07/21/taleb-and-f...

_delirium2• 16 years ago

> FWIW, the Austrian Schools predictions go back many years, including accurately predicting the great depression, the fall of communism-- not just that it would fall, but how exactly it would fall and why-- 70 years in advance, etc.

Are there any validated studies of this, rather than just anecdotal evidence? I'd be interested in a detailed retrospective study on predictive accuracy of economists, but I haven't found one. Are their predictions precise enough to be tested, rather than Nostradamus-like? Have they made any big whopping mispredictions that you're omitting from your list, and how frequent are those compared to the correct predictions?

drallison2• 16 years ago

You write: "I would like to point out that the understanding of real world economics is developed enough to make very accurate predictions. "For instance, I knew in late 2000 or early 2001 that there would be a housing boom, a housing bubble, and a banking crisis when it burst. ..."

I don't think "knowing" constitutes prediction. If a housing bubble were predictable, the factors creating it, the timing, the drivers, and all manner of detail would have been generally known, as would the impact of the bubble in the short, medium, and long term. Moreover, we would have been able to explore various options that would mitigate the impact of the bubble or eliminate it all together.

cturner• 16 years ago

You're asking after 'experimental validation' but vague on detail. It's a difficult topic. Economics is not a sandbox. For macroeconomic topics, you can't create a cluster of equal samples and then test them.

And where you have tools to predict what will happen, you may be changing the future due to the feedback loop. If somebody writes a paper demonstrating that a market will go up over a certain period, they may influence readers and cause the market to go up sooner.

Soros discusses this feedback loop at length in _ The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means_, which is a book about his philosophy dressed up to sell copies in the wake of the crisis.

The issue of scientific approaches to testing economic theories is a major fault-line within economics.

    Me, I doubt that the unfettered free market economy
    can deliver what is promised.

What promise, and by whom?

The alternative to a free market is the various degrees of intervention that are making it not-free. Often, this means government interference. Tariffs and other forms of pork-barreling.

It was a major achievement for humans to reach a point where we could isolate power structures from trade. We've since moved a long way from it. The free market is cheap to maintain, simple, scalable, transparent and - by definition - free of political interference. It is not a system, it is an absence of system. It doesn't make promises.

    Without better understanding, we will continue to fly
    blind, waste resources, and make sub-optimal decisions.

This will always happen. You can't predict the future reliably, and where you do, you may change it.

It's a dud goal to want to create super-hacker economists who knowingly steer the economy. The best we can do is to create simple, well-understood circumstances that everyone knows, and where everyone is subject to the same rules.

lzw7• 16 years ago

Fortunately, free market economists, such as the Austrian School and the Chicago School are so marginalized by the dominant neo-Keynsians that you can't make the claim that they have had enough influence to make their predictions into self fulfilling prophecies!

Wait, no, that's unfortunate, actually. Considering all the lives that have been destroyed as result.

ajg19772• 16 years ago

But no mention whatsoever how paying down federal debt instead of stimulus would supposedly have strengthened the economy.

The argument for paying down our debt is usually to prevent inflation or keep future borrowing cheap, but despite the plunge in GDP neither of these are anywhere close to becoming an issue.

Speaking of GDP - it's not the deficit that's responsible for the US's decreasing GDP/debt ratio, it's the drop in tax income due to the job losses following the financial meltdown.

There is plenty to dislike about how the stimulus turned out (too small, partially negated by state-level cuts, focus on tax cuts), but no evidence whatsoever that it made things worse.

lzw7• 16 years ago

You mentioned the evidence that it made things worse, by obama's own numbers, the unemployment rates are much higher than he claimed they would be if we DIDN'T pass the bill.

The "stimulus" destroyed jobs, as all government spending does, and it made the economy worse.

Further, it is deficit spending that is killing us, as we are incurring unprecedented deficits.

Finally, borrowing is already becomming a problem with indications that the FED is printing money to participate in the auctions (using a major bank of convenience, of course) in order to keep auction rates low... this means that the treasury auctions have already started to fail. Further, the auctions for the last 2 years have shown a sharp shift towards shorter term notes, which means the amount that has to be rolled over at each auction is snowballing.

ajg19772• 16 years ago

You mentioned the evidence that it made things worse, by obama's own numbers, the unemployment rates are much higher than he claimed they would be if we DIDN'T pass the bill.

How is that evidence it made things worse? It could be evidence that job losses were far more severe than anyone anticipated, but with the stimulus they were still lower than without.

Your following two statements are basically soundbites with no reasoning, or basis in economic theory.

c00p3r• 16 years ago

Such a big discovery!

If you have spent billions and billions of borrowed dollars and got nothing, but interest payments for your increased debt, it surely seems like you've made things worse.

Black Swan' Author Taleb: Stimulus Made Economic Crisis Worse

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