Posted on Monday, October 4, 2010
A mere half-hour after Treasury Secretary Timothy Geithner praised the "necessary" and "very substantial" actions of the Bush and Obama administrations to "break the back of the financial crisis," one of the world's leading financial minds said Thursday that the United States is in the same economic predicament today as it was in 2007, predicting that within 25 years the Federal Reserve "will be gone."
Nassim Nicholas Taleb, renowned derivatives trader, university professor and author of "The Black Swan," warned a gathering in Washington of the growing risk the nation has taken on as a result of poor decisions by the Fed and policymakers, including trillions of dollars in taxpayer money funneled into bailouts of private industry.
"This transformation from private debt ... to public debt" is "bad" from a risk standpoint and "immoral" from an ethical standpoint, Taleb -- a member of the Derivatives Hall of Fame whose book became a bestseller -- told a crowd at the Washington Ideas Forum, an event held by The Atlantic and The Aspen Institute. Deficits "will break the Fed" and it will be replaced, he predicted.
"The Romans had a saying," Taleb added: "The grandchildren should not bear the debt of the grandparents."
That debt is made more dangerous, Taleb said, by the increasingly complexities of the financial system, a problem that he said has not been ameliorated during the last three years. "Debt and complexity are not friends," he said, because "complexity causes unpredictability," and heavy debt burdens mean one false move, whether by an individual actor or a system, could spell disaster.
Nobel Prize-winning economist Paul Krugman, a popular columnist for The New York Times, "doesn't understand" the economic situation the U.S. finds itself in, Taleb claimed, nor do most economists.
Because of the significant rise in debt, within 25 years "anything fragile will break," Taleb said. That includes the Fed, he argued, because the Fed "fragilized this country."
"The Fed is what got us here," he said, because of its inattention to risks in the financial system. "It's like someone flying a plane without understanding how to fly."
Geithner appeared before the same crowd shortly before Taleb. His assessment of the economy and actions taken in response was essentially the exact opposite.
The Treasury Secretary, who as the head of the Federal Reserve Bank of New York played a key role in the immediate response to 2008's financial meltdown, told the crowd that without the "very substantial" financial force brought to bear "early and quickly" to fight the crisis, "nothing else would be possible."
"It's worth just stepping back and recognizing that this country did do the necessary thing ... in acting earlier to break the back of the financial crisis," Geithner said in reference to controversial actions such as the Troubled Asset Relief Program and the stimulus bill.
Referring to the $800 billion stimulus as "exceptionally large" and TARP as "overwhelming financial force," Geithner said the two policy decisions are the two most important judgments made by the outgoing Bush administration and incoming Obama administration.
Though private-sector economists generally conclude that the stimulus was a success, the unemployment rate has jumped from 8.2 percent to 9.6 percent since it was enacted into law on Feb. 17, 2009, Labor Department figures show. Economists argue that unemployment would have been much higher without the stimulus, though they acknowledge it would likely be lower if the stimulus had been larger.
As for TARP, it helped the banking sector recover by instilling confidence in market participants -- in part because the world now knew that the U.S. government was prepared to rescue large, systemically-important institutions by virtually any means necessary. The Fed's multi-trillion dollar commitment to the financial sector and its near-zero interest rate policy likely helped, too.