Skin in the Game: Hidden Asymmetries in Daily Life is the latest instalment of Nassim Nicholas Taleb's Incerto series, which is "a combination of a) practical discussions b) philosophical tales, and c) scientific and analytical commentary on the problems of randomness, and how to live, eat, sleep, argue, fight, befriend, work, have fun, and make decisions under uncertainty" (description from the Introduction). This article is a limited review of some of the aspects of the discussion of the book that relates to economics and finance. My beat is bond market economics, I am not here to offer advice on how to live, eat, sleep, etc. As a result, my discussion here is not really enough information to decide whether to buy the book or not, instead, I am just discussing a few points that intersect with the subjects I normally discuss....Bond Economics
Comments On "Skin In The Game"
Brian Romanchuk
“Bailouts by a lender-of-last-resort is an inevitable feature of the system (as I discussed here). Obviously, if you own a lot of deep out-of-the-money put options on banking stocks, this is not to your advantage. However, society has a lot more interest in avoiding the collateral damage created by a financial meltdown than delivering profits to options buyers. “
ReplyDeleteMy recollection of that time was that he was very frustrated about this...
Also I would point out that his is an extremely stochastic view of the financial world vs what is ideally a deterministic view...
However, society has a lot more interest in avoiding the collateral damage created by a financial meltdown than delivering profits to options buyers. “
ReplyDeleteIf we had a sane, not to mention ethical, financial system then we would have an additional 100% risk-free, 100% liquid-at-all-times payment system in addition to our current at-risk, not-necessarily-liquid payment system that must work through the banks.
That additional payment system and the removal of all other privileges for the banks would greatly reduce the ability of the banks to hold the economy hostage.
But if helping the usury cartel during a crisis was nevertheless deemed necessary then additional fiat could be ethically injected into the economy via equal fiat distributions to all citizens.
So no, a lender of last resort is neither needed nor desirable.