Taleb sees $40 to $70 trillion needed in global deleveraging
Jul 3rd 2009 2:00PM
Updated Dec 4th 2009 1:22PM
Appearing on CNBC Thursday morning, Black Swan author Nassim Taleb, talked down the importance of the recent unemployment number, instead turning attention to the idea of deleveraging the global economy. Taleb dismissed the list of forecasters and their predictions, because it "did not have anyone who saw this crisis coming," and explained that one month's economic numbers include too much variation to imply what is actually happening in the world.
Taleb, who came to prominence for his early warnings about the dangerous practices at financial institutions, instead directed the discussion toward the big picture, voicing his concerns about the direction of the economy and public policy. "The system is very fragile. You may have green shoots or whatever you call them . . . but you're still in a world which is breaking, and that world should break. Nature breaks anything that's too big," he explained. As finance became increasingly reliant on exotic products and high leverage ratios, complexity grew far beyond what regulators could understand or should have allowed.
As a result, there is excessive leverage in too many parts of the world; Taleb estimates that $40 trillion to $70 trillion globally needs to be deleveraged. The United States annual GDP is approximately $14 trillion. Until the financing problem is solved, it's going to be difficult to resume normal, healthy growth. "We're in the middle of the crash, so if I was going to forecast something, I know it's going to get worse, not better . . . You're going to have much less leverage in the system."
But Taleb is not convinced the process is fully underway. Rather than working off debts, he says the government is looking to inflate asset prices through stimulus plans. If asset prices were to undergo inflation, it would effectively lower relative debt levels, although people would not be any wealthier. Having monetary and fiscal policy pursuing this route is worrisome, because such actions often have unintended consequences. "Actually, they don't even know what they're doing. They're doing a lot of contradictory things . . . Monetary policy is something that's out of control."
Taleb says "we're in an environment that does not resemble the past at all," so current policy cannot be based on anything that has happened in the past.
As the Federal Reserve has introduced an array of programs to restore confidence to debt markets and promote lending, its balance sheet more than doubled to over $2 trillion, from under $900 billion before the crisis. Chairman Ben Bernanke has been criticized by some for using the Fed's powers to allow debts to continue to linger.
Looking at mortgages, Taleb said, "The government can very easily go to banks and start immediately having the conversion of debt to equity . . . to me, it's the only solution." He suggested that homeowners facing default give up a significant portion of ownership in the house to the bank, in exchange for a smaller stake and a payment they could afford, almost the exact opposite of a government program announced this week to lend underwater homeowners even more money to refinance their mortgages.
James Cullen also edits and writes at CollegeAnalysts.com.