U.S. more fragile than Europe: Taleb

Forget Europe. The U.S. is more fragile, says Nassim Taleb.

According to the author of The Black Swan, the country’s highly centralized government and hefty public debt make it more vulnerable to outsized shocks, also known as black-swan events.

“It takes $2 trillion a year just to make the U.S. function,” Taleb told last night’s event hosted by the Alternative Investment Management Association in Toronto.

He compared the U.S. to an elephant: big and strong, but if you break its leg, it’s done for. Europe’s grouping of decentralized governments means it’s more flexible, and can break apart if necessary. (These, and similar statements made at an event in Montreal, are meant as “long-term structural calls.”)

Read: Europe needs to take a stand

His pick for world’s most robust country? Switzerland, with its decentralized, bottom-up government. To illustrate, he asked, “Can anyone name the president of Switzerland?” The audience was silent.

Taleb discourages the current policy of stabilization, saying an artificial even keel can lead to greater vulnerability — forests that don’t experience periodic, smaller fires will be destroyed if ignited. He pointed to banks’ profits, which had been artificially subsidized by the real estate industry in the years leading up to the 2008 crash, as an example.

Reforming the banking system

Taleb says banks should be forbidden to take risks with public money. And taxpayers should have a say in bankers’ salaries.

“They are de-facto civil servants after the bailout,” he said.

He also advocated greater accountability for the industry.

“The Code of Hammurabi said an architect is responsible with his life if a house collapses. As long as that architect’s alive, you know you’re safe because he didn’t hide any risk in the basement. […] Let’s use the Volcker Rule, at least.”

He holds up the hedge-fund industry as an example of one that knows how to handle risk; noting at least 2,800 have closed since the 2008 crash. And most of the time, that doesn’t make the news, because the closures were handled as orderly wind downs by the fund managers.

That proves the industry is resilient. “There’s always new blood. I’m sure two hedge funds have folded since I started this speech,” he joked.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.