Thursday, October 16, 2008

An emerging narrative

Nicholas Nassim Taleb doesn't seem to be a big fan of the financial sector, but in one way the notion of the "Black Swan" he has popularized is helping to weave a narrative which provides cover for the looting carried out by the sector. It goes like this: the crisis was fundamentally unpredictable, a real Black swan event, so who could have known? Shrug. Call in the government. Wait a couple of years. Start looting again.

This is a huge distortion of what has really happened. While the full extent of the crisis has been a surprise I think to most people, the underlying issues - a house price bubble, crazy short-term incentives and a mass capture of national wealth by the finance sector - have long been recognized by a number of commentators. Of course, the ruling elites have never wanted to hear these views, so for some years they've filled the opinion pages of WSJ, FT, London Times, Telegraph etc. with hand-picked cheerleaders for the looting. Now that the sleight of hand has become plain to see, the story has switched to this one of complete unpredictability.

The problems with the finance sector were no Black Swan. The sector's been sucking the nation dry for some years, and with a compliant government buying into it's story has driven (i) a crazy house price bubble, (ii) a huge misallocation of human capital (read smart young people) away from other tasks (health, energy, research, training, transport) into an increasingly zero-sum, if not negative-sum financial game, (iii) a capture of wealth (something like 40% os all UK corporate profits, and that's after paying out those huge salaries; finance adds some value, but that much relative to everything else?) leading to the remarkable phenomenon of stagnant real wags at a time of increasing productivity and (iv) a broader corruption of the public sphere in which taxes are seen as nothing more than a drag on the economy, leading to under-provision of public goods at a time when they're needed more than ever.

Beware the emerging narrative. The underlying causes of this mess have been evident for years, and need to be addressed as soon as possible.

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