Larry Summers takes fight to Nassim Taleb at SALT 2014

Larry Summers, Harvard Professor and White House National Economic council during the financial crisis went head-to-head with Nassim Taleb, author of “The Black Swan” and Distinguished Scientific Advisor. Sparing no niceties, Skybridge Managing Partner and Founder Anthony Scaramucci jumped right in, asking Larry Summers, “When you look at the global economic landscape, what do you like? What worries you?” At this point, the panelists were still relatively calm but their body language suggested their bodies were entering the ‘fight' mode of fight or flight. Summers eases into, talking about how the fall of 2008 was much worse than the crash of 1929 and that today, we're much better off than we were in 1934. Before Taleb jumps in, Summers tells us that he sees, “the lower bound on interest rates is going to be an important constraint on economic policy,” and, “I don't think it's plausible to think we're at the end of financial instability, even if we appear to have relatively low volatility.” Taleb pounced on Summer's relaxed posture in his opening remarks, “When you have a crisis like we had, it was a very good painkiller to stop the bleeding, but it did not address the cancer.” Taleb follows up right away with the solution. “We have a lack of skin in the game, greater than any point in history. My idea of skin in the game overlaps with what economists call moral hazard.” “Today, banks are bigger. Too big to fail is worse than ever.” Before he could take a breath, Summers jumped on, “If you look at market values of equity, major financial institutions are much better capitalized.” Summers is very quick to point out to Taleb that we are better off and decisions were made to provide stability and restore confidence in the markets. He tells Taleb, “The mistake is to not recognize that things were done to put the pieces back together. Right now, the increase in capital requirements, the increase in transparency will protect the stability of the system.” Taleb comes back with historical context, citing government bailouts going back to his time as a trader in 1983. Traders in the 80's called government bailouts “government puts,” and Taleb says, “The government put caused every bailout to get bigger. Everytime it gets bigger. Rates are at zero.” Anthony Scaramucci, appearing to Larry Summers side but trying to remain neutral asserts, “there is no perfect solution,” to which Taleb tells him, “To avoid systemic risk, you want to make the system more insulated, more organically able to handle crisis.” According to Taleb, no one was hurt in the financial crisis. Those taking the risks were ultimately bailed out and then shortly after the crisis received major bonuses. Summers tells Taleb, “I think you way overstated the case that no one suffered in this last crisis. We shouldn't rest easy that the system is adequately failsafe.” Summers tells him, “It's overstated when you say no people suffered.” Continuing, Summers tells Taleb that, “the govnerment has made money on their interventions,” to which Taleb says, “These people are using the system.” “Two years after Lehman, you still had people running multi-million dollar derivative books with huge bonuses and tax payer money.” Taleb says, “If an organization is bailed out they're effectively civil servants. We can bail out organizations that are systemic and let ones fail that aren't.” Summers shoots back, “We had that before 2008.” Taleb marches on, “Let's go back to when banks were boring and not taking too much risk.” He wants a system where banks are utilities and investment bankers take the risks. A now feisty Summers says, “We need to have some factual discipline here. The idea that somehow what happened with Glass-Steagall is the cause doesn't hold water. The institutions that got in trouble weren't the ones that combined banking and investment banking. Lehman was not a bank.” Taleb responds by reiterating that there needs to be skin in the game by the people participating in decisions that carry risk and that, referring to bailouts, the government should not be a sponsor of risk. As the session nears the end, Summers simplifies his plan for Taleb, “My plan is lots more capital, more liquidity, and procedures for handling failures of big banks.” He then simplifies Taleb's plan by saying, “Your plan is the civil service financial system and the let it rip financial system.” Taleb looks at Summers and says, “you shouldn't be able to get upside as a financial institution without the downside.”