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Nassim Taleb: Ban Tesco bonuses

12 February 2012

There have been precious few people able to make sense of the crash. The main
commentators didn’t see it coming — and so have focused their energies stressing how no man born of woman could have predicted it. But Nassim Taleb did. He has been a voice of sense,
originality and common sense throughout, and David Cameron has been listening. The respect is mutual: Taleb even described Cameron as ‘the best hope we have left on this planet’ because
he understood the dangers of deficits. If CoffeeHousers haven’t come across Taleb’s books, such as Fooled by Randomness and Black Swan, I can’t recommend them
enough. I met him recently, and published the interview in this week’s magazine. As ever, with print, you have limited space — and I kept it to his thoughts on policies currently being
adopted by the government. But there’s plenty more. But for those who are interested, here’s a longer ten-point breakdown of his other arguments:

1) Hubris, then nemesis. Taleb was a trader for nine years, and saw enough of Wall St to be appalled by its hubris. Mathematicians, whose world is one of absolutes and certainty,
had taken over economics — which, done properly, is one of doubt. Guys at the banks — with their quant analysis and their computer models — thought they could eliminate risk. It
never works, says Taleb. We can predict eclipses, but never revolutions, nor the discovery of North Sea oil, nor war in his native Lebanon which had been stable for generations. This is what
happened in the Bubble Years: banks and governments were sure they had created a ‘great moderation’ (Greenspan) or the elimination of boom and bust (Brown), and borrowed massively.

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2) The QE deception. ‘Quantitative easing is a transfer of wealth from the poor to the rich. It floods banks with money, which they use to pay themselves bonuses. The banks
have money, and assets, so they can borrow easily. The poor guy, who is unemployed and can’t borrow, is not going to benefit from it… The state is subsidising the rich. It is the top 1 per
cent who benefit from quantitative easing, not the 99 per cent.’ Taleb rejects the idea that QE can be controlled. ‘It’s like a ketchup bottle. You try to pour money out of the
ketchup bottle: nothing comes out, nothing comes out — and then everything splashes. This is how it works. Inflation doesn’t arrive in a nice, manageable way, so don’t mess with
it. Every single person who has tried QE, or a form of printing money, has effectively lost the argument. Turkey had it, Brazil had it, Argentina had it, Italy had it when they debased the lira.
Even Weimar Germany claimed that QE made the government rich. There’s always an argument to print money.’ The Weimar scheme was not QE, as currently defined. I asked him if the
comparison was really fair. ‘Anyone printing money is trying a kind of stimulus with money they don’t have. You have this illusion that it is going to create growth.’ His point is
not that fiscal destruction is guaranteed, but that it can’t be ruled out. ‘We have a 90 per cent chance of seeing nothing and 10 per cent of having an explosion.’ And what might that
QE explosion involve? ‘Runaway prices. It has happened a lot in history. If you think you’re creating employment, you’re not.’

3) The danger of debt.
There will always be bubbles and crashes, Taleb says, and he’s all in favour of them. But what he’s worried about is scale. If a bank buys rival banks
(like RBS did) it becomes too big to fail. Then the free market ends: because the state has to bail out the bank. He loathes debt, because it scales up risk. And the bigger they come, the harder
they fall. He’s against anything getting too big, because they get fragile. His next book is about his notion of anti-fragility.

4) Positive Black Swans.
He says the opposite of ‘fragility’ is being too robust: robust things don’t respond to any surprises, good or bad. Sometimes, good surprises
come along. He didn’t mention it in our interview, but a good example is the discovery of shale gas. Our huge government has made lots of plans for windfarms, etc, on the basis that
we’re going to run out of oil. But in the last five years, shale has emerged as an energy source able to keep the UK going for 100 years. And what’s the UK government doing about this?
Nothing, because shale wasn’t in The Plan. Failure to respond to a ‘positive black swan’ is almost as bad as being blindsided by a bad one. Again, this is an argument against
scale: it takes longer to change the course big tankers.

5) Five Year Plans.
Taleb’s pet hate is five-year plans, because they are based on the false assumption that anyone can see five years into the future. He’s evangelical about
the dangers of false certainty, and the peril of believing computer-generated projections about pretty much anything. I asked him what, then, we should make of Osborne’s budget plan, which
lasts all the way to April 2017. ‘Bullshit,’ he replied with a smile. ‘Look at past five-year plans, how many have worked? It’s like someone getting married eight times,
each time thinking “this time it’s for love.”’ I asked him how long should governments draw their budgets for. ‘One year at a time,’ he says. ‘The error
margin for five years is monstrous.’ One-year plans were the norm before Brown came into the Treasury.

6) Cameron has been forced into a ‘Ponzi Scheme’. I asked him what we should make of a UK government plan to grow the economy by £100 billion but increase
national debt by £360 billion. The analogy Taleb reaches for is not flattering. ‘In any Ponzi scheme, there is great growth initially,’ he says. ‘Then you have to pay it
back.’ By his book, debt-fuelled growth is not real growth at all. But he’s quick to add that Cameron, having inherited one of the largest deficits in the world, had limited choices.
‘Debt may be necessary for a while, you don’t want to create great social disruption,’ he says.

7) Scale matters.
Taleb’s enemy is monolithic structures, and he thinks this is worse than a big state. This is what interests No.10 in particular: his intellectual (as opposed to
the practical or emotional) case for decentralisation, grounded in the Popperian logic of piecemeal social reform, rather than utopian top-down reform. He regards large companies as being
inherently riskier than smaller companies, and public policy (including competition policy) needs to take this into account. Which means that….

8) Tesco should be banned from paying bonuses. Here’s his argument: that that bailouts introduce the idea of unspoken government insurance — a very valuable policy, a
safety net being provided for free to firms deemed ‘too big to fail’. He argues in Black Swan that bonuses encourage managers to hide risk. So he’d draw up ‘a list
of companies that may be bailed out if they fail and you tell them you can no longer give bonuses so managers can hide risk.’ Being added to this list would encourage companies to slim down,
so their failure would not lead to a bailout. ‘If Tesco tomorrow was to fail, the government is going to have to do some bail out. So: no bonuses.’ That would force Tesco to cut down in
size, he says. I asked if this were an odd policy for a free society. ‘No, it is no longer free. A free society is one in which you are not harming others, but you are harming taxpayers. If I
have to bail you out, that is no longer capitalism.’

9) Size of government matters more than its structure. ‘Big government projects have horrible prediction errors.  Local things don’t, because prediction error is
compounded by size. If you double the size, you more than quadruple the prediction error.’ This isn’t an argument for privatisation, just breakup. ‘I don’t even care if it
is private or public so long as the unit is small.’ I mentioned to him Nye Bevan’s dictum, when creating the NHS, that a bedpan dropped in a hospital ward should echo around Whitehall.
‘That is the opposite to how it should be,’ he said. ‘If I am the head of a hospital unit and I fail, people will see me walk or go to church on Sunday. The disciplinarian is the
house of worship or going to the pub and running into your victims.’

10) Judge Cameron by his aims, not his actions.
Taleb’s comments on coalition policies — the ‘Ponzi’ debt, the ‘bullshit’ projections, the
‘illusory’ QE — seem pretty damning. But he says that Cameron ‘had no choice’ because of the mess he inherited. And he still very much believes in Cameron
himself. The two had a conversation recorded on YouTube (see here) which shows the level of their agreement. To me, Taleb puts his finger on
a major (and under-explored) aspect of Cameronism. He was elected talking about the dangers of debt — but ended up planning to borrow more in five years than Labour did in 13. Cameron’s
spirit was willing, but the Treasury’s flesh proved weak. But Taleb doesn’t hold it against Cameron. He appreciates how easy it is for ‘political philosophers’ like him to
describe the promise land. It’s a politician’s job is to work out how to get there. ‘I try to stay outside immediate debates,’ he told me. ‘I talk about the structure
that we should arrive at, not what should be done tomorrow morning.’ It could be that Cameron is following Brownite policies of five-year plans and debt toleration as a tactic, to reach a
Conservative (or, Taleb would say, ‘anti-fragile’) destination. We’d all better hope the gamble pays off.

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Show comments
  • Tell Sid

    A ‘slimed down’ David Cameron? Your slip is showing.

  • Bill Corr

    Happy and contented Lebanon?

    Stable for generations?

    Someone needs to try reading more history than he writes.

  • El Sid

    On (8) bonuses the problem is not so much the bonus, but the fact that things like options only work one way. You don’t get penalised if things go wrong, which incentivises you to make lots of risky one-way bets. Human beings are much more incentivised by fear of loss – so someone like Goodwin should take his bonus in shares, locked in for 5 years or more. He should have to share the pain of shareholders if things go wrong.

  • El Sid

    Taleb is always good value. I’d disagree with a few points though.

    On (5), five-year plans – I sympathise but in fact huge inefficiencies can be introduced by allowing certain budgets to be subject to political whims year-by-year, particularly on complicated procurements like defence. In fact it’s one of the key recommendations by Bernard Gray that the defence procurement budget should be fixed for 5-6 years like they do in France, just to stop the MoD wasting so much money as it changes its mind. The other side is that a 5-year procurement gives certainty to industry, allowing it to invest in capital equipment that brings down the cost of the widgets – the US is now doing this quite a bit, despite their traditional reluctance to multi-year fund military stuff on constitutional grounds.

    On (7), scale, this is nothing particularly new. I remember at the time of the Natwest takeover, someone arguing that Natwest was already too big – mostly on grounds of bureaucracy gumming up the works of any company that was bigger. Too big to fail has added another dimension to this of course.

  • Herbert Thornton

    Scary Biscuits (Feb 13th, 11:52am) –

    Well said! Your summary is entirely accurate.

  • Cynic

    I would disagree that few saw the economic crisis coming. Few in the MSM and Westminster village, probably, but here at the grassroots many people were looking at the credit-fuelled lifestyle and the 125% self-certified mortgages and shaking our heads. We despaired at the advertisements for ‘on demand’ loans to take holidays. We knew it couldn’t last and the reckoning would arrive some time.

  • Cynic

    @chinasyndromeOnly good thing about this article is the picture; a slimed (sic) down DC having the time of his life!” A Freudian slip, CS?

  • Cynic

    Taleb even described Cameron as ‘the best hope we have left on this planet’…” Heaven help us, then!

  • chinasyndrome

    I agree with heartless…

    Only good thing about this article is the picture; a slimed down DC having the time of his life!

  • Scary Biscuits

    I agree with all this article except the last point, 10. We must judge Cameron by his actions not his words. Up until now we have indulged in too much wishful thinking about his true agenda, preferring to believe, as does Taleb, that his Brownite actions are a tactical cover for a more strategic Conservativism. Frankly, the more we see of Cameron, the less plausible this becomes. Tim Montgommery is right when he says that it is now clear that the authentic Cameron is the one we saw laughing in the rose garden with Clegg. He is leading to catastrohpe, whilst allowing us to hope against the evidence that he supports our principles and sound money. Charming, calm in a crisis and good on telly as he is, we need to remove him as otherwise there will soon be not only no Conservative Party but also no United Kingdom.

  • Sir Graphus

    Lots of people saw it coming. We used to sit at our desks, hearing about 5 x mortgages and all that, quaking, saying to each other “this really can’t last”

  • Anthony Hewson

    Two reforms to change the world.
    1. Abolish limited liability. This would force owners to manage and lead to smaller, better businesses.
    2. Abolish Corporation Tax. Corporations do not pay it, they pass it on to their customers. The resulting increase in income tax would more than compensate. Then abolish income tax.

  • Mirtha Tidville

    Sorry this Taleb character was the only one who saw a crash appearing??..are you serious..Most of us, of a certain age, who have lived through various recessions and drawdowns saw it coming. We just could not predict where and when but guess what, when we spoke out and warned of excesses we were branded as naysayers..

    Guess your chum must be of a certain age, but there again he thinks Cameron has some merit so maybe not eh…

  • Archie Ponsonby

    I’ve a far better idea. Ban Tesco!

  • 2trueblue

    paying back and servicing debts is a very expensive business, especially when all your friends are up to their ears in debt at the same time. We live in a world that is unused to managing on what we actually earn. In the UK Liebore stole our future by putting us in such debt, downgrading our achievements whilst deluding us that standards were going up. We have to work our way through it and that is the pure economics of our situation.

    Those who did see what was happening were told not to talk things down. The debts have yet to be totally unwound so we are a long way from paying the bill. All western governments spent money on themselves, i.e., governments . Not very good for the balance sheets but great for the ego.

  • TrevorsDen

    Shale has still to be proven. I hope it is.

    But as with most arguments it gets carried away with itself. No Tesco bonuses? Why? And why would the govt rather than some other entrepreneur have to bale out Tesco.

    Slash the debt? well Labour claims we arfe so you can imagine the politics if we actually did. And besides all that – slashing debt would really hammer the poor.

  • Kevin

    I cannot see Cameron implementing any of these policies, because I do not see him implementing them. The first positive change I would like to see him adopt is to restore government control of monetary policy. If we are to live under a kleptocracy, at least let it be a democratic one. The naked attempt to permanently prop up inflated house prices will not only drive the young out of Britain, which is bad enough, it will also drive out immigrants.

  • libertarian

    Sorry he lost me on Tesco bonuses, WHY should Tesco or any other business be too big to fail? Why should’t they fail if they don’t manage their business correctly. In fact failure is very necessary to allow creativity and reinvention.

    No bank, no business, indeed no country or superstate ( the EU for example) is too big to fail. Throughout history whole empires have failed and the world has grown and improved.

  • Jeremy


    Nothing against yourself, but I’m not convinced…

  • Dimoto

    From a US point of view, Taleb’s prescriptions make sense.
    There are dozens of gigantic companies with feet of clay.

    The UK has few large companies, and splitting them would just be a fine way of preparing them for the crowds of international vultures.

    Wallmart, Carrefour & co would love a bite-sized Tesco to swallow up ….. kind of strange that the US Mr Taleb didn’t mention the (much larger and more cumbersome) Wallmart as the prime candidate for break-up, No ?

    Remember what happened when the city forced ICI to break up ?
    The small AKZO snapped up the chemical business, which allowed it to become a European “giant”.
    Remember GEC (UK) ?

    Perhaps Taleb should have had a look at the incubating strange beast that is Xstrata-Glencore ?

  • Nick Grealy

    Interesting that you mention shale, too bad he didn’t. I’ve mentioned Nicholas Taleb several times at No Hot Air, including describing the Blackpool discoveries as a Black Swan.
    A Black Swan is a low probability, high impact event and shale fits the bill perfectly.
    Winning the Euro Millions is a low probability high impact event. But unfortunately the conventional media wisdom has been to relentlessly highlight even lower probability events such as earthquakes.

    This kind of shoddy analysis doesn’t do a disservice to the the nation or the economy: that isn’t the point. This kind of analysis is meant to prop up the Fifty Year Plan of UK energy policy. It won’t work long term, but it’s mighty inconvenient short term for those who have a vested interest in not being convinced about shale.

  • Herbert Thornton

    Mr. Taleb’s summing up of what has gone wrong and what we should be aiming for is, apart from one aspect, very persuasive indeed. But I find it hard to believe that Mr. Taleb really has the faith in David Cameron that Fraser asserts. How can anyone, for example have much faith in a man who has allowed himself to be – as Fraser puts it – “forced into a Ponzi scheme?

    My next comment may be trivial, but it makes me wonder how much attention Fraser pays to the headings to his own articles. When people read “Taleb” immediately followed by “ban” it must surely raise eyebrows……

  • Heartless Curmudgeon

    Taleb even described Cameron as ‘the best hope we have left on this planet’

    Fraser, – sure your name should head this piece, – not the boy Danny?

    Anyway, we’re finished if our best hope is the H2B.

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