A Dose of Reality

This week, Ben Bernanke told us that the recession “is very likely over.” Jim Cramer told us, “We’re in much better shape than anyone could have hoped for a year ago, despite the pessimistic chatter.” I have often reviewed the dismal records of Bernanke and Cramer; you would be wise to manage your finances without considering their prognostications. A news story yesterday echoed Bernanke and Cramer: “Americans’ wealth rose this spring for the first time in nearly two years, with stocks and home values gaining as the recession faded.” No doubt, with these kinds of stories appearing almost daily and the Dow approaching 10,000, many small investors will be caught up in the growing bullishness.

If you are worried that you will be left behind by a new bull market, read a recent interview with Nassim Taleb, author The Black Swan: The Impact of the Highly Improbable. Talem—who does not believe that experts such as economists, bankers, and government officials can control the economy—is an outsider to the orthodoxy.

Notably, in the interview, Talem disputes those who say the economic crisis was an unpredictable  “black swan event,” to use the language of his book. His failure to predict should disqualify Bernanke from making policy about anything. Below are excerpts from the interview in Toronto’s Globe and Mail.

Nassim Taleb (NT): Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient’s symptoms – and transformed the tumour into a metastatic tumour. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.

Margaret Wente (MW): Are you saying the U.S. shouldn’t have done all those bailouts? What was the alternative?

NT: Blood, sweat and tears. A lot of the growth of the past few years was fake growth from debt. So swallow the losses, be dignified and move on. Suck it up.

MW: I gather you’re not too impressed with the folks in Washington who are handling this crisis.

NT: Ben Bernanke saved nothing! He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumour and says the patient is doing very well. The first thing I would tell Chinese officials is, how can you buy U.S. bonds as long as Larry Summers is there? He’s a textbook case of overconfidence. Look what happened to Harvard’s finances. They took a lot of risk they didn’t understand, and it was a disaster. That’s the Larry Summers mentality.

To use a baseball analogy, if you believe Bernanke, we are in the 9th inning of a game. The home team, with their star reliever on the mound, is about to win. If you look at our problems through another lens—a lens which rejects the idea that economies can be cured by throwing good money after bad—we are in the 3rd or 4th inning of a global economic crisis with the most frightening part of the game still to be played.

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5 Responses to A Dose of Reality

  1. nrosanoff says:

    Barry,
    Love your writing/wisdom. I found you when I googled Polly Berends. I just completed producing a documentary on Metapsychiatry – and the work of Dr. Hora – which I noticed you quoting. Warm regards from one interested in similar ideas.
    Nancy Rosanoff

  2. Nancy,

    Thank you for the kind words. I love your work too. My blogroll links to your Metapsychiatry series with Ruth Robins. I’m very much looking forward to your new DVD.

  3. Tesh says:

    Isn’t it Bill Fleckenstein who keeps using the baseball analogy? Last I read his articles, we weren’t even out of the first inning.

    Either way, yes, there is a LOT more going on that needs unwinding before we can call anything a victory. As it happens, I’d be happy putting Keynes to rest and calling *that* a victory.

  4. Tesh,

    It will be hard to put Keynes to rest. When the next leg down starts, Paul Krugman and others will simply start to chant: we should have spent even more.

  5. Steve Pilotte says:

    Barry,
    I would also recommend Taleb’s book “Fooled By Randomness”. Though I disagree with Taleb’s premise that markets are random, much of what we experience in life is. The “random outliers” which he believes get many investors and speculators into trouble are actually explained well by the Wave Principle and can often be predicted by it as well. Nevertheless, Taleb offers much sound and sage advise about both life and the markets. Thanks for sharing this interview with us.

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