Jim's Blog

Taleb, a very smart guy for whom I have immense respect, says the five trillion in effect wound up being stolen by the banksters.

If we just look at events over the last few years, that is obviously untrue. In the USA the money was for the most part pissed away in politically correct loans to irresponsible people, most of them Hispanic, many of them with no jobs, who purchased million dollar houses no money down and never made a payment. If the house went up they flipped it, if it went down they lived in it rent free, and many of them are still in those houses even today. In other countries the scam varied, but the general pattern was that money was pissed away on major voting blocks and/or the politically well connected, not directly on the banksters.

But since Taleb is a smart guy, that cannot be what he means. What he is talking about is asymmetric risk: Heads the the bankers win, tails the tax payer loses. The bankers make big bets, and if the bets pay off, pocket the profits. If the bets go bad, the taxpayer pays up. In this sense, the bankers stole the money, not in the sense that the money went directly to them. They were willing to make politically correct bets because if the bets paid off, they would make money, and if the bets went bad, the taxpayer would lose money.

Taleb moans plaintively that the banks are allowed to get away with this because they are so politically powerful. While he is smart about risk and economics, this is just political stupidity – that or, more likely, political correctness. If you trace the political debate on the risk before things blew up, it was the left that wanted the financial institutions to take bigger risks. Politicians of all parties, but especially the left, like being able to use financial institutions as a political slush fund to pay off voting blocks, interest groups, and special friends. If financial institutions were apt to lose their own money, they would be substantially less cooperative. Government guaranteed financial institutions mean that politicians and bureaucrats can covertly spend money and the bill does not show up until several elections later.

This entry was posted on Monday, September 5th, 2011 at 06:26 and is filed under economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.