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reason: Most people would say when you have a system and if there’s a contagion in it, if there’s a cancer in it, if there’s some kind of stressor that starts taking over, it’s going to spread to the whole system. This is what we hear about the banking system, the financial crisis. You’re arguing that a robust or an antifragile system is capable of seeing this part of the system being cancered and learning from it.
Taleb: To cite the great Yogi Berra, a good antifragile system is a system in which all mistakes are good mistakes. And the bad system is one, again to paraphrase Yogi Berra, where you tend to make the wrong mistakes. Let’s compare the banking system to, say, transportation. Every plane crash makes the next plane crash less likely and our transportation safer. Now, with the banking system, [a failure] leads to increased probability of failure of an entire system. That’s a bad system.
reason: What’s the best way to stop that so you’re not allowing the problem to replicate throughout the system?
Taleb: What fragilizes an overall system? Three things: One, centralization. Decentralization spreads mistakes, makes smaller mistakes. Decentralization is where we converge with libertarians. A second one is low debt. The third is skin in the game.
reason: Paul Krugman, one of your great friends or nemeses, just recently wrote that these trillion-dollar deficits don’t matter.
Taleb: All these economists, let’s put it this way: Risk is not their thing.
Debt leads to fragility. We’ve discovered since the Babylonians that debt has systemic consequences whereas equity doesn’t. Let’s say that you have two brothers. One of them borrowed and they both had predictions about the future—forecasts. One brother borrows. The other issues equity. The one who borrows will go bust if he makes a mistake. The one who issues equity will fluctuate but will be able to survive a forecast error.
reason: But is it also true that the brother with equity can never really have that big payday?
Taleb: For him! But overall the system is well distributed. There’s an accounting equality. Debt traditionally has blown up systems and has been very good for governments to wage war. I’m not against credit. I’m against leverage.
reason: So you give me a loan and I say I’m going to pay you back and that gives me the ability to get something in the short run that will help me produce more in the long run. That’s OK?
Taleb: Banking started [like this]: You’re going to Aleppo, Syria, and Florence and you’re going to send me some silk. You trust me, and my correspondent in Aleppo would pay you the minute I get my silk—that kind of transaction. That’s called letter of credit, where you have debt conditional on some commercial transaction being completed. And it also allows people to finance some inventory, provided the buyer is a committed buyer. That kind of facilitation of commerce is how it all started—the letter of credit—and it developed very well.
Before that we had debt in society and it led to blowups in Babylon, and then they had to have debt jubilees. Then of course the Hebrews also had debt jubilees. And of course, they say neither a borrower nor a lender be. The Romans didn’t like debt. The Greeks didn’t like debt, except for a few intellectuals. Intellectuals for some reason, like Mr. Krugman, like debt.
Later on debt came back to Europe with the Reformation and it was mostly to finance wars. The industrial revolution was not financed by debt. California was not financed by debt; it was financed by equity. So debt is not necessary. You can use it for emergencies. Catholic societies—Aquinas was against debt and his statements were stronger than the Islamic fatwa against debt.
We have learned through history that debt in the form of leverage can blow things up. Debt fragilizes. Now what we have had in this economy is a growth of debt mostly financed indirectly by governments. Because if you blow up, we’re going to be behind you.
reason: So this is the problem of too big to fail, which went from being a worry to being inscribed in official policy?