[neilk]

I think Taleb's main complaint is that Obama has not changed the incentives for Wall Streeters to put the economy at risk. Instead, we've had a big and apparently permanent transfer of risk from private to public, exacerbating the situation.

A Goldman Sachs executive just boasted that their business methods hadn't changed at all from before the crash. Think about that for a second.

[BrentRitterbeck]

I hear this from people all the time. From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it. In addition to that, the markets exist to transfer risk from one party to another. People outside of finance need to realize that companies like Goldman, when they are speculating, serve a legitimate purpose. They provide a mass of liquidity that otherwise wouldn't be there. So, before you start thinking about changing the way things work, imagine what things would be like if you attempt to remove speculators from the market. If you tie Wall Street's hands too much, last year's freezing of the credit market would look like a nice summer day.

[lutorm]

Yet markets worked before mortgage-backed securities were invented. Have you read Talib's books? He's not arguing against taking risks, he's arguing that we shouldn't take risks that might bankrupt us, based on some high-falutin' economic model that says that the payoff is slightly larger than the risk, because the calculation is likely to be wrong. And he's arguing that because we can never understand these single events (the Black Swans) we must absolutely never put all our eggs in one basket. Resiliency is more important than efficiency, because in the long run the efficiency is an illusion brought on by imperfect understanding.

[BrentRitterbeck]

Yes, I have read Taleb's books and numerous academic articles by him. My comment was not about Taleb. It was a direct response to the parent of my comment.

[neilk]

Your slippery slope looks pretty flat to me. Some regulation does not mean locking down the entire market. And anyway, Taleb is proposing complete liberation for speculators; the only thing is they can't do it and expect bailouts, and they can't get some quasi-official stamp that says "AAA", please invest widows' and orphans' money here.

From a financial viewpoint, the markets exist to transfer capital from those that have it to those that need it.

No, that's what communism was supposed to do. Under capitalism, we use the market to allocate capital efficiently, to its most productive use. Perverse incentives, like excessive bonuses or government bailouts without penalties, interfere with the efficient allocation of capital.

[BrentRitterbeck]

Your twist on the poor being the group that "needs" the money is a clever little play on words, but you, and everyone else here, knows exactly what I meant. Companies need money. Investors have money.

As for some god-given right to bank accounts, I never said any such thing. It's not my fault, nor Wall Street's fault, that people aren't better prepared to understand finance. It's a dog eat dog world. If you want to keep hold of your money, learn how to invest for yourself, place it with a broker and accept that even they may lose money, or hide it in your bed. Those are your options.

Under capitalism, we use the market to allocate capital efficiently, to its most productive use.

You are not distilling finance enough. Your definition is a first-year economics definition. That's a definition from an idealized world. In the real world, companies exchange shares for cash. They invest that cash into the business to create value. Other instruments have their own purposes, but it's all about taking either money or risk and transferring it from one party to another based on needs.

[neilk]

You're right in some of your criticisms -- I had already edited it to remove some of that language.

But do we have no middle ground here?

We agree, for instance, that most people really AREN'T equipped to understand finance as it is practiced. The difference is that you believe there is a class of people whose advice can be relied upon. Taleb thinks not for epistemological reasons. The perverse incentives I mentioned are (for him) barely worth discussing, since they are just corruption rather than self-delusion.

(And when I say corruption, I don't mean they are necessarily evil people; I mean their agenda is now misaligned with the customers').

Anyway, I keep saying "Taleb says" because I am not well versed in these matters. I study it about as much as a layperson can, and all I know is that most of it still seems too complex to predict.

[BrentRitterbeck]

There is a class of people whose advice can be relied upon. It's up to you to find out who those people are. If your broker is not performing up to snuff, you have the right to fire him. It's just like I have the right to fire my auto mechanic, who knows more about cars than I do, if he's not doing a good job.

As for finance being complex, it's really not.

[jpendry]

they pulled those tricks because widows and orphans money was regulated so it had to be in 'AAA' products, and the widows and orphans demanded higher returns because 'everybody' else was getting higher returns or they were going to invest they're money elsewhere.

look, by no means am i blaming 'widows and orphans' for this mess, it's just the reasons for it are very complex. even regulation that seems like a great idea, grading investment products, ended up playing some small part in the chaos.