This was an interesting event!
On May 17th 1792, twenty-four stock brokers met under a buttonwood tree outside 68 Wall Street and agreed to set up the New York Stock and Exchange board. The tree was a symbol of Wall Street, but also, it was where people originally met to trade, to discuss and to argue.
The Economist has done an excellent job of keeping the tradition alive by bringing together top global financial executives, policymakers, global regulators and opinion leaders to discuss and debate proposed guidelines for the financial community, seeking to bridge fundamental financial issues with macroeconomic and geopolitical viewpoints.
As I mentioned yesterday, I usually don’t like conferences but not only did I find myself sitting between BOE Governor Mervyn King and Nobel Prize winner Joseph Stiglitz but we got to watch my favorite economics rap video together and even met the guys who created it from EconStories, who have lots of good videos on their site (of a more serious nature).
The conference itself does not take itself too seriously. Even Nassim Taleb was able to make a few jokes while explaining to us why the financial system is irrevocably screwed up unless we give it a major overhaul. Taleb’s main points were:
- People are inherently greedy.
- The Financial Crisis was caused by and increase of hidden risks that was encouraged by the rules set forth in Basel II
- Multiple exposure to low-probability, high-risk events accumulate to high probability of bad outcome (Taleb’s “Black Swan“).
- Bonus packages and compensation encourage very bad risky behavior. Stock options that offer potential upside and no downside encourage the maxing of risk-taking by potential beneficiaries.
- This leads to a banking system where all the traders get rich and all the investors become poor.
- There is a general,.chronic underestimation of risk and business schools reinforce this bad behavior.
- Regulation gives investors a false sense of security.
- Capitalism must be symmetrical – bonus without penalties (clawbacks, etc.) must be eliminated.
When I am at one of these conferences, I like to watch the audience reaction to what is being said. Here we have a gathering of the World’s movers and shakers and sometimes the reaction to what is being said is more important than the thing that is said. For instance, my note on Taleb’s comment that regulations give investors a false sense of security is that Mervyn King laughed and nodded on that one. That’s pretty telling.
Of course, King made his own point quite well in what was…
