Nicholas Taleb: The Great Bank Robbery | Hacker News Reader

Nicholas Taleb: The Great Bank Robbery

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‎$5 Trillion is a lot of money even over 10 years.

It's 7 years and 35 days worth of ALL the U.S.A.'s collected taxes. It's ~$25,000 paid by each adult in the U.S.A.

It's $1M every day for the whole of humanity's 5,000,000 year existence.

Paid to the already wealthy shareholders and employees of a few banks…

I think there might be an error in your maths :)

5M years times 365 days times $1M is 1825 trillion dollars or just under 2 quadrillion.

Actually I just realised that you probably meant to write "year" instead of "day"

oops… I stuck the numbers into Wolfram Alpha. Must have made a boo-boo. I'll recheck and re-edit.

No I won't. It won't let me edit it. My foolishness can live on for posterity.

Its about 4x the entire net worth of the poorest half of America.

My biggest concern about 2007 collapse is that we DID NOT reform financial system after the collapse. Everything remains the same. The banks still operate in same way as before 2007.

And everybody should be careful to bet on recovery: we have a financial system which relies on public funds to be viable. We did not envolve.

We should do two things:

- allow failed banks to fail (ok maybe some gov oversight but essentially they should be broken up and sold in pieces)

- the regulatory system must be reformed (reform credit rating agencies, etc.)

they tried to pass reform, but the office in charge of it keeps getting its funding blocked by congress.

Ratings required by the SEC, and the public, should not come from 'for profit' companies (S&P, Moodys, Fitch)when investment banks are allowed to shop around for the best rating. Blatant conflict of interest.

I was hoping this would be a quality piece of investigative journalism, but it seems very heavy on editorial content and unsupported assertions; and very low on reporting of facts. Just to give one example, it is not even explained where the headline figure of $2.2 billion comes from.

I was very disappointed because I am sure Taleb has enough command of the facts to write an article on this topic that is actually informative.

The article makes a very strange assertion:

That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees.

What does the author believe the bank executives and employees do with that money? Some of it is spent on consumption, but most bank executives consume a far smaller portion of their income than anyone else. [1]

Whatever they don't consume is reinvested in the economy.

[1] If you disagree with this claim, then it logically follows that the best form of Keynesian stimulus is tax cuts for bank executives.

if bank executives don't consume a smaller portion of their income than anyone else, it follows that the best form of keynesian stimulus is tax cuts for those executives?

But they do. Because unlike most people, bank executives don't spend most of what they earn on housing, clothing and feeding their families. Even in the best of times, the rich spend less of their income than the others. Right now, they're spending even less than usual, particularly in terms of investment, because of the bleak economic outlook.

yes. i agree. i don't follow the argument i was reply to at all.

The purpose of Keynesian stimulus is to stimulate spending. Most proponents of Keynesian policies oppose directing stimulus to the rich people on the theory that rich people spend the smallest fraction of their income (i.e., they save the most).

i don't see how that shows that "the best" form of stimulus would be to lower their taxes.

He's saying that if the rich are spending more of their money in the economy then we should be giving them even more tax breaks so they could spend even more in the economy.

Probably the reason you didn't get what he meant was because it's utterly nonsensical.

You make the assumption that their re-investment is necessarily in the US economy.

You are apparently making the assumption that economies are autarkic silos.

edit: 'k' not 'ch'.

Even supposing (as aarghh points out) that the unconsumed money is reinvested in the US economy, I think it's important to ask, what part of that economy? I would expect most of it goes back into the financial services industry -- banks, hedge funds, etc.

I think we as a society have to deal with the fact that the financial services industry is more and more about extracting wealth from the rest of the economy and that it is producing less and less of real value relative to its profits.

And what is 'real value'?

It's a tough question, but so is: what is just? Like justice value is a possibly unknowable, possibly immeasurable communal platonic. We forged, refined, and sanity check our justice system using a few simple tricks from measurement theory. We ensure that the commonly agreed on axioms are covered (i.e. murder is wrong). We try to reduce several "intuitively agreeable" outcomes into simple rulesets (i.e. possession is 9/10ths of the law). And so on... Yes it's hard and our current system is only an approximation of the communal ideal, but few would want to dismiss law altogether because such measurement systems can do a pretty good job.

Defining value by the workings of the market is simply a circular and technical argument. It's no more useful than defining justice by actual outcomes of court cases. For one thing, markets define value rather simply: a simple majority vote where present and future votes are discounted. It's a pretty good rule with the nice feature that it's distributed requiring no central planning, but it is not magic and does have some less than desirable corner cases such as, say, the state of everyone at the lower end of the bell curve in western countries for the last four or five years.

This is a helpful reply.

> For one thing, markets define value rather simply: a simple majority vote where present and future votes are discounted.

Well it's a bit more fiddly than that. A better analogy is that markets integrate individual tradeoffs. That is, value is constantly established by exchange: I give up 2X for 4Y. I value X at 2Y at the moment.

Economists call this "subjective value". The point being that no objective measure can be thought of which isn't circular or ultimately subjective, relying on some exogenous assignment of value.

If I say 'value' is something like 'hours of labour', then I've just pushed back the definition. Why are labour hours valuable? If it's 'ability to support life', I've merely promoted life-support to a higher value and ignored all other considerations; but are all economic decisions so made with a singular objective? Again I've just made a subjective judgement about what is and isn't valuable.

Did he really say that $5 trillion dollars went into the pockets of bank executives?

Is he aware that there is about $10 trillion dollars of money in the entire US? (M2 and lower money supply.)

So basically the personal accounts of bankers has half of all the money in the US?

Are we sure this isn't an Austin Powers movie?

cumulatively

Whatever they don't consume is reinvested in the economy.

You'd be forgiven for saying that because thats always been the case. Until 2009.

http://research.stlouisfed.org/fred2/series/EXCRESNS

The banks don't spend the money, they stuff it in the Fed. The bankers dont spend the money (as you point out), they put it in bank, or in treasuries, or they buy stock (and then the seller puts it in a bank, or in treasuries, or they buy stock). Or they pay off some debt. Sometimes, rarely, the money is invested in a small company that actually creates jobs. However, if I was rich and didn't give a shit about my fellow citizens, I'd be investing in emerging economies, not the USA. Any evidence bankers are like that?

New jobs come from small businesses. $5t would jump start a lot of small businesses.

The irony is that if that $5t were invested in small businesses etc, the bankers would probably be making just as much if not more.

What are Treasuries, exactly?

are you asking for an explanation? these are treasuries: http://en.wikipedia.org/wiki/United_States_Treasury_security

Strange circular reasoning. Why should taxpayers pay the banks to lend them money at interest?

The Fed has been doing this as a backhanded way of recapitalizing the financial sector (lending money at extremely low rates which banks then pour into liquid but higher-paying investments like Treasuries along with more speculative leveraged plays against the USD).

It isn't hard for players with privileged access to capital to print money in this situation, and this is what makes the exorbitant compensation rankle: if the unstated justification for the money pump is to recapitalize the financial sector the constant hemorrhaging of assets on personnel compensation is parasitic and abusive.

The bankers dont spend the money (as you point out), they put it in bank, or in treasuries, or they buy stock (and then the seller puts it in a bank, or in treasuries, or they buy stock).

In that case, the money is actually being invested by the government in "roads, schools, and other long-term projects".

Or at least some portion of it is - the rest is given to favored classes of Americans (a big chunk of govt spending is redistribution, not investment).

The financial system appears to be an instrument of theft. Regardless of what percentages of their incomes bankers invest and consume, this doesn't change the fact that there is an ongoing and significant transfer of wealth from the many to the few. A transfer that defies market outcomes because over the long terms banks only make losses. Rolling Stone once portrayed a major investment bank as a giant "Vampire Squid". Maybe they were onto something.

You should read The Economics of Innocent Fraud. http://www.amazon.co.uk/Economics-Innocent-Fraud-Pocket-Peng...

>Whatever they don't consume is reinvested in the economy.

This is true of all financial transactions. The question is, are resources being allocated efficiently? As the authors state - that 5 trillion is not going to build schools or hospitals.

As the authors state - that 5 trillion is not going to build schools or hospitals.

It's almost certain that some chunk of it is being spent on (for-profit) hospitals and schools. But you are correct - some it is is spent on automotive manufacturing, telecom infrastructure, heavy equipment producers, sporting goods, etc.

Is there some reason to believe that schools and hospitals is a better use of the money than these other projects?

You are almost right but you are neglecting a major factor: the uneven distribution of wealth. Simple example:

Lets say I make 100k but 30k goes to "taxes", meant to be spent on public utilities that (more or less) benefit me, such as roads, schools, infrastructure, etc.

However, of that 30k, 10k goes into the pockets of executive bankers (golden parachutes, salaries, etc) or privately held companies. This does not really benefit me - I was expecting that money to go towards things that benefit me.

That money will go back into the economy, but not to my (direct) benefit -- the bank execs will spend it on things that probably only benefit them. Only part of it will go back to taxes (whatever taxes the execs pay on their golden parachutes, salaries, etc).

So, not only is my money being spent on things that do not benefit me, but it is rewarding the reckless behavior of bank executives.

In shorter words: I am paying 30k to the government, I expect them to use that 30k to provide services that benefit everybody equally, not reward a few reckless bank execs.

Where did you get the idea that the government would be spending your $30k on public utilities? Most of your $30k would merely be taken and redistributed to other people. Another substantial chunk would be devoted to defending Europe from the Soviets/Islamists/whoever the military is actually set up to protect.

http://www.usgovernmentspending.com/year2008_US.html

I'm not sure why you feel more valuable to to take money from the banker and give it to old people than to allow the banker to invest in Netflix/Walmart/other businesses that provide value to millions of people. Could you explain?

Yes, I think you still miss the point though:

Lets say 10k goes to this banker, and he spends it on Netflix/Wallmart/etc. That mostly benefits HIM. Really, I should get to spend that 10k on Wallmart/Netflix/etc. so that it benefits ME.

Both cases benefit the economy, but the banker benefits more if he spends the money. In otherwords, money that I could spend on myself to boost the economy is instead being given to someone else who does not deserve it. Does that make sense?

In general, I am for a SMALL government - that means I would prefer that taxes be minimized, and whatever can be privatized should be. I do not support our government's excessive defense budget (although I do support the troops, who actually get very little of the overall defense budget).

That mostly benefits HIM. Really, I should get to spend that 10k on Wallmart/Netflix/etc. so that it benefits ME.

If you are advocating for reducing taxation and redistribution, I agree with you.

I was merely arguing against the dichotomy implicitly put forth by the author - either the government spends the money, or else it is wasted.

"defending Europe"

I have to point out that a lot of Europeans were never very happy with being "defended" in the manner you describe.

If America wanted to removed bases from Europe to save money I think that would be sensible for both Europe and the United States.

So, you advocate tax revenue aggregating to the Fed, then the redistribution being managed by private banks? Shouldn't that up to the People?

I guess there's just some political dissonance I perceive in the comments here: On one hand it's not okay if the government uses taxpayer revenue to "redistribute wealth" back to the people because, and I'm back-napkinning here, it'll fall into an endless void of unsustainable amounts of soulless feral children, big and flat screen TVs in every room including the bathroom, and shiny accoutrements for unaffordable cars. Oh, and let's ignore food and clothes because these savage poor and old people wear tatters to protect their shame and also eat their rims. But, miraculously, all those products and pharmaceuticals and adult undergarments and electric motor scooters for the mall are somehow not units of work exchanged for units of money. It's a pit -- a hungry, ceaseless, unending pit of despair that we should starve and force into servitude and submission rather than give a dime to.

On the other hand, it's okay if banks who form the FOMC distributed tax revenue to themselves because it'll get reallocated to other rich people across the globe, who as we all know are accountable for 100% of the jobs and job growth that has or will ever be made in the history of US commerce, Amen. Oh, and (jedi hand wave) forget the crash of 2008, the S&L bailout of the 80s, the Great Depression, and all the various major crashes in between all fueled by speculation and 20x margin accounts and other toxic assets. They'll always do good by the taxpayer. Always.

So, you advocate tax revenue aggregating to the Fed, then the redistribution being managed by private banks?

I didn't advocate any policy, I merely pointed out a logical error by the author.

Banks lend out more money than they have. They report to their account holders that they have the money on hand. That is both fraud and a ponzi scheme.

This is the root of the entire problem. Until fractional reserve lending is frowned upon internationally, as money laundering is, this problem will not end.

Of course, there is no political will to end fractional reserve lending. Both politicians and those who elect them demand economic growth today, and in as much volume as possible. As we are seeing now, the results of a bust only serves to aggregates this problem while during a boom the system appears to be fully functional and healthy.

So build your companies for wealthy bankers.

I share the authors' concerns however I'm not so sure that investment managers can be relied upon to make the investment decisions they have described. Like the large bank executives, investment managers earn large sums of money and, I believe, are likely to identify with bank execs in that regard. People who earn huge amounts of money tend to rationalize their compensation. They believe they are worth it. In fact, Taleb makes this point in one of his books when describing successful traders. In fact, most of the people in a position alter the state of affairs in compensation disparity are the 'winners' in terms of power and/or money and would seem unlikely to want to change things. The remarkable thing is that America has lasted so long without the huge income gulf that exists in other countries. Not sure what the answer is, but I don't think it's from within the 'winners'.

Dr. Taleb's book, Black Swan, was a truly interesting treatment of long-tail statistical events and how humans perceive said events. It is unfortunate to see him indulging in so much hand waving in this article.

"For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding $2.2 trillion...... is directly transferred from the American economy to the personal accounts of bank executives and employees"

I don't understand where this number is coming from. According to the data from the 2007 Economic Census[1], the U.S. commercial banking sector employed (approx) 1.6 million employes and compensated them with a total payroll of (approx) 95.8 billion dollars. Total payroll for the finance and industry industries is $502 billion for 6.2 million employees.

What is this $2.2 trillion that he is referring to? In his opening statement, he makes it sound as if this amount is direct compensation, but the actual numbers for the industry make that figure seem unlikely. (I am not an accountant, but I seriously doubt that some type of compensation that doesn't appear on the annual payroll is going to make up the bulk of that difference.)

"That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects"

First of all, this $5 Trillion dollar number is a projection, and projections need to be analyzed critically[2]. Second of all, this is wrong (as pointed out by yummyfajitas elsewhere in this thread). So long as money is not being (quite literally) stuffed into a mattress, it is doing something in the economy. Now whether that something offers benefits over opportunity cost may be a product of market failings and questionable regulations, but that can hardly be blamed on the banking industry.

"It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact \“Black Swan\” events and benefiting from the free backstop of implicit public guarantees."

I think that it is disingenuous to paint the entire industry as being composed of individuals out to cheat the system. I think that it makes more sense to note the behavioral economics at work.

A disturbing number of financial institutions were making money from home mortgage loans. Any financial industry not doing so would be left out of the crowd. Regulations allowed for massive leveraged financial positions to be taken in the market. Financial companies became more and more aggressive (after all, the models say everything is fine, and if we don't play along shareholders will question our financial performance). The bottom fell out and everyone got clubbed (but some worse than others).

There is no great, malevolent force working in finance. The industry was governed by (and possibly still is) some pretty lackluster regulations, but it is a questionable premise to paint the entire industry as willfully fraudulent.

"it also has provided secret loans of $1.2 trillion to banks."

Activity by the Fed is not "secret" but rather it is a matter of public recored: http://www.federalreserve.gov/

(Or, more specifically: http://www.federalreserve.gov/releases/h41/current/h41.htm )

"We don’t believe that regulation is a panacea for this state of affairs. The largest, most sophisticated banks have become expert at remaining one step ahead of regulators"

This is not really the case. It is more the case that the regulators are often underpaid (relative to what they could make in the private banking industry) and over-worked (due to staffing cuts). This creates an accelerated revolving door between the public and private spheres. This revolving door makes it very hard to get any good regulations out of our current institutions.

"A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance."

A well-functioning market would favor the banks that offer the best risk-return ratios. Now whether or not the measure of risk is correct will only be obvious in hindsight, but market outcomes are a product of aggregate information on a grand scale. Exposures, compensation schemes, risk-sharing... These are not the kind of factors that are rewarded in a free-market (unless his definition of well-functioning is some variation of central control).

If you want to institute a change in the incentives within the finance and banking industry, just institute a very, very small transactions tax. This would decrease the viability of trading for its own sake (make enough trades fast enough, have a slightly more than random number of successes, and profit).

It wouldn't fix everything, but if you are a critic of the current structure of the industry, then a small transaction tax is the thing that is most likely to move the industry further away from the temptation to function like a glorified roulette wheel.

I'm not even going to address the problems with Dr. Taleb's proposed solution to problems in the banking industry (last three paragraphs of the article). It makes no sense.

[1] 2007 is the most recent data available. It is not the most up to date (the banking sector is likely a bit smaller now), but it is worth using some actual facts and figures. Direct access here (industry code 522110 for commercial banking): http://factfinder.census.gov/servlet/DatasetMainPageServlet?...

[2] http://xkcd.com/605/

Respectfully, I think you are overanalyzing something that is very simple.

1) Humans are very good at cheating the system. In fact, we are built to cheat, and we have come up with amazing ways of cheating and scamming people out of their money. To ignore this is to ignore hard facts that are right in our face.

2) Most people are honest. But it only takes a few dishonest people to do a lot of damage. And with the right amount of money, you can get away with anything in this country.

3) Corruption is the most seductive activity you can engage in with your clothes still on.

4) It goes beyond conspiracy at this point - we can literally see money transferring hands. Is it not funny that almost everybody was against the bailouts, but the govt. green flagged them regardless? Is it also not a bit strange that every past Secretary of Treasury for the past few decades has been affiliated with Goldman Sachs?

As for free markets and regulation:

Do you believe in evolution? I do. Evolution gets a LOT of things wrong in the beginning, but in the end, it usually produces pretty ideal designs. Evolution is what happens when you have an environment free of artificial contraints.

Likewise, I think that the best economy will be produced by many mistakes, and learning from them. One thing I am pretty sure we will learn is that no corruptible entity should ever control an economy, because corruption is always the end result. (All hail our new robot overlords :D)

And I will just leave this here: http://en.wikipedia.org/wiki/Friedrich_von_Hayek I'm sure you have probably read up on this guy.

I appreciate your thoughtful reply. While I am making the transition to a web developer at the moment, I have a graduate degree in Economics and I have spent some time working in the investment industry (Main St, not Wall St). I would just like to share an alternative viewpoint with you:

1) I wouldn't think of it as "cheating the system", but I would think of it as rational self-interest. Given a set of constraints, people will optimize for the best personal outcome.

2) People maximize their utility (utility is a measure of happiness). Whether someone is honest or dishonest is nothing more than a preference input into their utility maximization functions.

What this means is that if the punishment for breaking some law is exceeded by the benefits (to the individual) of doing so, then that individual will break the law. Think about how many people casually drive 5 to 10 miles over the speed limit (or 20 to 30 down here in Texas).

With that said, whose dishonesty is responsible for the housing collapse:

* Were the homeowners dishonest for taking on loans they could not afford to pay back?

* Were the lenders and real estate agents dishonest for making the loans to the home owners?

* Were the finance guys responsible for thinking that risk could be mitigated using the tools of finance?

* Were the investors being dishonest for cheering on returns that were above market-average without considering the risk?

Painting a market with the brushes of corruption and dishonesty does very little to advance an understanding of how the event happened and what can be done to prevent it in the future.

4) Professionals with an understanding of the financial industry were generally in favor of the bailouts. The government listened to the professionals.

Goldman Sachs hires a lot of economists and finance guys, and they hire the people with the best resumes. One should hardly scream conspiracy if it turns out that some of these "cream of the crop" individuals end up working in the treasury. Statistically, the probability of it happening randomly is actually quite high.

"Likewise, I think that the best economy will be produced by many mistakes, and learning from them."

I completely agree with this.

"One thing I am pretty sure we will learn is that no corruptible entity should ever control an economy, because corruption is always the end result. (All hail our new robot overlords :D)"

There is no need for us to resort to robots. We simply have to understand that people are self-interested and build a system that channels this self-interest into outcomes that are efficient for society as a whole.

"And I will just leave this here: http://en.wikipedia.org/wiki/Friedrich_von_Hayek I'm sure you have probably read up on this guy."

Hayek was an amazing logician, but the application of his theories to the modern economy is unproductive. The questions that he asked have been answered by modern economics in the 50 years that have passed since he asked them.

I consider myself an advocate for breaking down the wall that exists between modern economics and people that would like to increase their understanding of modern economics without being economists themselves. If you have anything that you would like to ask me about anything that I wrote above (or any of Hayek's specific points), then I would be happy to answer them (regardless of the beating that my karma takes).

"There is no need for us to resort to robots. We simply have to understand that people are self-interested and build a system that channels this self-interest into outcomes that are efficient for society as a whole."

Here's the difficulty that Hayek was pointing out in his book Road to Serfdom. Who gets to decide what the right outcomes are and whether they are efficient?

"Who gets to decide what the right outcomes are and whether they are efficient?"

Whether or not an outcome is "right" is subjective, and is more in the field of law and philosophy than economics.

Whether or not an outcome is efficient for society does not need to be determined as it can be measured. An outcome is efficient for society if it makes at least one individual better off without leaving any other individuals worse off. (This is Pareto efficiency).

Of course in the real world, there will almost always be winners and losers with any policy change. The solution is thus to make sure that the total net benefits of any policy change is positive.

The net benefits are the benefits (both implied and explicit) of a policy minus both the costs of doing the policy and the costs of potential gains that could have been had by pursuing alternative policies. Both the costs and the benefits should be aggregates that include the costs and the benefits to all parties affected by a policy.

One thing that I think is worth thinking about when you look at recent developments in the markets is this. From the time period of roughly the 1950s to roughly the 1980s this form of detailed cost-benefit analysis was popularly employed by both governments and private companies. (I am not actually this old, but I have heard this story multiple times from economists considerably more seasoned than me).

Unfortunately, starting in the 1980s, a more expedient form of cost-benefit analysis that focuses mostly on the immediate costs and benefits to the organization conducting the analysis began to dominate. This type of analysis was championed by the finance and accounting oriented economists that began to spring up at around this time. (Disagreement over this and other issues led to university economics departments around the nation dividing from business departments and finding a new home - and less funding - with the liberal arts and social sciences.)

It is expensive and time-consuming to conduct a thorough impact analysis, so I can understand why the more academic approach would fade away in favor of something more expedient. However, I think that a lot of the recent problems we see in governance can be traced to this fast-food economic analysis:

* Lack of investment in infrastructure? - Well, this report on my desk says that it will be expensive to fix those roads and the ones we have now seem to be holding up just fine

* Internet providers want to throttle bandwidth based on its source? - Makes sense, according to this report on my desk providing bandwidth obviously costs money - why not charge for it?

* A tax on transactions? - Well, this report on my desk says that would make it more expensive to trade stocks - there's no way this could be beneficial.

While the right answers to many of these questions can be found either in economic journals or by speaking with an independent consultant, policymakers rarely have the enthusiasm for a topic to dive so deeply.

I hope that soul-searching due to the financial meltdown brings the old approach back in favor. It is sorely missed.

Thank you for your thoughtful response to my response :)

As for who was responsible - I agree that finger-pointing and conspiracy does not really get us anywhere. In fact conspiracy is the least of my concerns...I am more concerned about the money that is being handed out in plain sight.

When it comes down to it, you cannot pin responsibility on any one party, but one thing did happen as a result, and some of this result was intentionally manufactured. That end result is the poor/middle-class getting poorer, and a few (transparently) dishonest people getting richer. But worst of all, a huge blow was taken on the economy that is affecting everybody, including the (honest) wealthy classes.

You can trace the beginning of the recession back 15 years or so. The funny thing is that people try to point fingers at Democrats or Republicans exclusively, while both parties have done their fair share of damage. And even US citizens have done a lot of damage, but there is a difference between being reckless and being naive. The former describes the people who leveraged debt, the latter describes your average US home buyer.

When it comes down to it, maybe no one was singularly responsible, but that does not really matter. What matters is that wealthy owners of private organizations were given tax-payer money. Executives were given golden parachutes even though their companies were bankrupt - guess who paid for these? Tax payer money was funneled into private companies with the purpose of "saving" them, only to have them trade as junk stock within a few months. Honest people were given mortgages that would soon turn into foreclosures - no one's fault, but I think they should be the people bailed out, not these corporations.

> 1) I wouldn't think of it as "cheating the system", but I would think of it as rational self-interest. Given a set of constraints, people will optimize for the best personal outcome.

In doing so they did break a number of laws, isn't that "cheating"?

But despite the technicalities, the point of it is that any adult could look at the results of their actions and decide that because they would produce negative outcomes for society that they should stop doing them, regardless of laws.

If these were Montana hermits hiding from civilization I'd cut them a break but these are giant institutions demanding not only legal protection from people trying to reclaim their funds, but bailouts as they hold our economy hostage.

> With that said, whose dishonesty is responsible for the housing collapse: > * Were the homeowners dishonest for taking on loans they could not afford to pay back? > * Were the lenders and real estate agents dishonest for making the loans to the home owners? > * Were the finance guys responsible for thinking that risk could be mitigated using the tools of finance? > * Were the investors being dishonest for cheering on returns that were above market-average without considering the risk?

Yes.

But the bankers who saw the big-picture were more dishonest and more responsible than the mortgage pushers and the investors who both should have known it was too good to be true, and all of them more responsible than the consumers who we don't actually expect to be actuarial experts, who did what their bank and society were encouraging them to do.

But yes, to the degree that they couldn't read that fine-print and educate themselves appropriately, then lobby to change things, they are ultimately responsible as they are where the government derives its mandate - to the degree that it does.

> Painting a market with the brushes of corruption and dishonesty does very little to advance an understanding of how the event happened and what can be done to prevent it in the future.

The reality is corruption and dishonesty, painting that picture is the only reasonable thing. Yes, we do need to understand that humanity is rife with the willingness to lie for gain, but we don't have to embrace it and treat it as okay just because it's normal.

"Normal" in that context is a branch up-side the head and the other guy is "right". But we strive for more than that, and need to be held accountable when we hurt others by failing.

We need reality-based finance, which assumes every other player is Mallory or Eve. Like with security.

> Goldman Sachs hires a lot of economists and finance guys, and they hire the people with the best resumes. One should hardly scream conspiracy if it turns out that some of these "cream of the crop" individuals end up working in the treasury. Statistically, the probability of it happening randomly is actually quite high.

Not at all. You approach it like working for or against corruption is the flip of a coin. Most people who'd go into regulatory agencies for reasons the public would approve wouldn't be interested in an industry job after. The fact that there's such a crossover only goes to show the positions are being held by amoral defectors.

Taleb says $2.2 trillion is for 5 years - which is ~5*505B (total payroll for finance as per your information). So, it looks ok to me.

Taking Spyro7's estimate of 6.2 million employees in the financial industry that comes out to $2,200,000,000,000 / 5 years / 6,200,000 people = $70,968/year salary per person. Sounds like a lot less of a robbery when you divide it out.

That is a bail-out salary from the tax payer! I'd say that's a pretty hefty robbery, I believe it is well above the average per-capita income, so for most people this is more than a year's wages handed to them by the government.

Guess that's what I get for doing math with no context. Thanks for the reminder to RTFA.

I don't understand where this number is coming from. According to the data from the 2007 Economic Census...

Then go check the SEC filings. If they refute Taleb's numbers, bring in the Census as corroborating data.

I think that it is disingenuous to paint the entire industry as being composed of individuals out to cheat the system. I think that it makes more sense to note the behavioral economics at work.

This is precisely what happened, though. The large investment banks went public and externalized their risks. 10 years of bonuses (privatized profit), then a big blowup (socialized loss). Was it planned that way? Does it matter?

By contrast, private partnerships never developed as much exposure or lost as much money, since they could not externalize risks to the same degree.

I bet you worked for an LLC, no?

Why not? Because you were once involved in investment management yourself, and you are a good & decent person, and therefore the industry as a whole must be comprised of similar people and follow similar patterns of behavior and judgement?

So you think paying regulators more would somehow auto-magically deal with regulatory capture? Seriously?

"Then go check the SEC filings."

Which ones? There are quite a few companies in the finance industry. If we are going to paint them as good guys and bad guys, then it is important to note that those are subjective criteria.

"This is precisely what happened, though. The large investment banks... Was it planned that way? Does it matter?"

Well, if your objective is to tar and feather people then I would suppose that it is important to find a villain.

However, if your objective is to understand what happened and how it could be prevented, then I think it is important to ask if something was planned or if it was a product of a flawed system. I can understand why you may disagree with me.

"Because you were once involved in investment management yourself, and you are a good & decent person, and therefore the industry as a whole must be comprised of similar people and follow similar patterns of behavior and judgement?"

No, actually quite the opposite. Please read my reply to another gentleman here:

http://news.ycombinator.com/item?id=2962088

If you have any questions, please ask me, I would be happy to discuss with you (regardless of the beating that my karma would likely take).

"So you think paying regulators more would somehow auto-magically deal with regulatory capture?"

There is no magic solution for regulatory capture, but the disparity in pay is a glaring problem. People respond to incentives.

Right now, many people view regulatory agencies as a career springboard to higher paying positions within the large investment banks. If the pay at the regulatory industries was more in line with what an individual with a similar background would earn elsewhere, then that would dramatically decrease this effect.

While we are talking about fixes, one more possible fix would be to dramatically restrict the creation of derivatives, because their complexity exceeds their usefulness as financial instruments at this point in time.

These are the types of things that would be useful to talk about. Dr. Taleb has both the knowledge and the breadth of experience to talk about them. Unfortunately, he chooses to focus the majority of his influence on labeling people within the banking industry as ethical and moral evildoers. (South African apartheid? Really? I find the implied analogy to be disgusting.)

Here's one investment banker's first hand version of what investment banking really has become...

"...My first job out of Cornell was on the trading floor at UBS. So when news would hit the wire about an American company closing a domestic factory, I felt a good deal of conflict as I watched the company’s stock price go up as a result. Those sorts of factory closings had ruined my neighbourhood, my city, and many of the people I’d grown up with. I was not alone in this feeling, but there were not many of us, either. One of my British friends from the training programme, who later became a currency trader, once told me: “I mean Christ, mate, every time they close a factory in Wales the goddamn market goes up. The whole system’s a little fucked, don’t you think?” And of course it was. The question was how to deal with it.

The easiest thing was buy into the system, convince ourselves that there was no other way to live. A few semesters worth of economics classes certainly helped; the in-house economics classes taught by the bank helped even more. The financial markets operate on the principle that, at our core, we’re all basically shit: selfish, self-interested creatures. There’s a whole branch of economics devoted to proving that if you help someone, say, run in front of a speeding train to push another person out of the way, you are actually acting out of self-interest, not altruism; that what most of us would consider humankind’s cardinal virtues - love, honor, compassion - do not actually exist.

The idea that we’re nothing more than selfish animals is an attractive philosophy to a person pulling down a few million dollars a year. It is a philosophy that negates guilt. The guilty feeling a normal person gets while visiting a Third World country is the same feeling a senior investment banker gets when they see a working class neighborhood in Birmingham or Philadelphia. When your paycheck could cover the salaries of a few hundred nurses or teachers, you need some explanation for why that’s okay. The only one that really works is that life is a pure meritocracy. That whether rich or poor, we’re all getting what we deserve.

The fact is, I became pretty good at making this argument myself. Until a roommate of mine, a guy named Mark Brewin, asked me: “So is that really what you want to be? A selfish animal?” “It’s not like we have a choice,” I said. “No,” he said. “You always have a choice. It’s just easier to pretend that you don’t.” Ouch. The strangest thing was, this thing I’d wanted for so long, this chance to become wealthy, was causing me more internal conflict than anything I’d ever done. I began writing a second novel, about a kid from the provinces who comes to Wall Street and is both drawn in and horrified by the culture of excess.

I understood it well. I put on 45 pounds in my first year at the bank, and, as you might guess, it was not from eating McDonalds. Occasionally I ate stuff like sushi, but mostly it was steak. We went to the good places like Sparks, Peter Luger’s, and the Strip House. We tended to look down on chains like Morton’s and Ruth’s Chris-they were for car dealers or stock brokers, not traders. Regardless of where we ate, we ate in quantity. My standard strategy was to order half a dozen appetisers, plus a steak and lobster, plus a few desserts and much wine as I could drink, as long it was under a few hundred dollars a bottle. Followed by a digestif, typically a 30-year-old port. There’s not any way to justify this except to say I was trying to catch up to my colleagues. We would treat those restaurants like Roman vomitoriums. And it wasn’t the food so much as the wine. Being a junior employee, I couldn’t really order bottles that cost more than a few hundred dollars, but the senior guys could get nicer stuff - Opus One, Chateau Latour. As long as we were out with a client, the bank paid. I remember being stunned the first time I saw a dinner bill for ten grand. But that was just the beginning.

What it boiled down to was austerity for everyone else and rampant consumption for ourselves. I never saw anyone literally set fire to money, but I did drink most of a bottle of 1983 Margaux ($2,000)...."

http://www.independent.co.uk/news/world/americas/american-ex...

That's what we're cutting Social Security and Medicare for... so some Goldman-Sachs or UBS investment banker can guzzle $1000 bottles of wine and vomit them back up again.

I just realized something, back in 2001, the day before the terrorist attack on the World Trade Centers, Donald Rumsfeld said that the Pentagon lost $2.3 trillion dollars.

It's funny how that same sum comes up again:

the elephant in the room is the amount of money paid to bankers over the last five years. For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding $2.2 trillion

The government seems to keep losing its money through malice and corruption.

There's a difference between "lost" and "qualified audit".

so.. what are you guys gonna do about it?

Apparently our politicians are going to continue to get paid by bankers to manufacture class warfare narratives that will get one half of the dying American middle class screaming at the other, allowing further decimation of organized labor by these same politicians, further enriching the bankers and ultra rich, etc.

I don't think Taleb has ever written a book or article that didn't use the phrase "Black Swan".

I don't care if you are a Republican, Democrat, Libertarian, Totalitarian, Socialist, Communist, or Anarchist. You should be angry. Very angry.

I don't even think it is a conspiracy at this point - there is so much in plain sight.

Everyone with me:

I'M MAD AS HELL AND I'M NOT GOING TO TAKE IT ANYMORE! :)

http://www.youtube.com/watch?v=q_qgVn-Op7Q&feature=playe...

Oh give me a fking break.

> That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees.

This argument applies to any salary paid by any firm. Plus of course salaries are spent and invested, which is the very definition of a successful economy.

> In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees.

Right. Just like any other public company.

This guy has made a career out of one single, simple premise, which through fortuitous timing on his behalf, made him a lot of money.

It's also extremely trite to be dissing the banks like this when everything he is is thanks to the banks. Doubly so as he profited from shorting the equity markets.

Whilst I'm not saying that banks don't have a fair amount to answer for, his arguments and assertions are bullshit, more characteristic of a hack journalistic seeking to sensationalise and troll, not a "Professor of Risk Engineering" at a top University. For some great comment on this and why Washington have a lot to answer as well, see Alastair Heath's piece [1] in today's City AM - a great journalist whose editorial column I read nearly every day and someone who actually knows his stuff.

1. http://www.cityam.com/news-and-analysis/allister-heath/how-w...

I don't think you understand...

The government is funneling tax-payer money into privately-owned organizations, like banks. Normal tax-payers are not reaping benefits from this (such as roads, schools, etc). But even then, I suspect most of this bailout money is going into golden parachutes for executives or bailing out bad/risky investments.

The original logic behind these bailouts is that it would somehow keep the economy more stable and "save" the companies - the latter part is a joke though because most of the bailed-out companies now trade as junk stock (Freddie Mac, Fannie Mae, etc).

Are you seriously trying to tell me that the banks are the only industry which either a) has been bailed out at some point or b) receives government subsidies?

I never made either of those claims, so I am not sure what you are trying to ask me. Many industries are subsidized (and bailed out) by the government - the farm and auto industries come to mind. In some cases, these bailouts are warranted, in some cases, they are not.

Regardless, the bailouts are not the real crime at hand. The real crime is that these bailouts are being used as a guise to stuff more money into the pockets of the already wealthy.

It's probably the industry that gets the biggest bailouts, the fastest, without any serious questioning and without having to make any changes. I would have been OK with the 2008 bailouts if there had been any serious reform of the banking sector. I think they should have reinstated some version of Glass-Steagall.

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