WHY DID THIS CRISIS HAPPEN?

Tuesday, August 3, 2010

WHY DID THIS CRISIS HAPPEN?

WHY DID THIS CRISIS HAPPEN?
by Nassim Taleb :
Summary of Causes: The interplay of the following five forces, all linked to the misperception and hiding of consequential tail events (Black Swans).

1) Increase in hidden tail risks across all aspects of economic life, not just banking; while tail risks are not possible to price, neither mathematically nor empirically. The same nonlinearity came from the increase in debt, operational leverage, and the use of complex derivatives.

2) Asymmetric and flawed incentives that favor risk hiding in the tails, two flaws in the compensation methods, based on cosmetic earnings not truly risk-adjusted ones a) asymmetric payoff: upside, never downside (free option); b) flawed
frequency: annual compensation for risks that blow-up every few years, with absence of claw-back provisions.
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Nouriel Roubini, (born March 29, 1958, Istanbul, Turkey), Turkish-born American economist and educator who was best known for predicting the 2007–08 subprime mortgage crisis in the United States and the subsequent global financial crisis.

Born to Iranian Jewish parents, Roubini moved with his family to Iran and Israel before they settled in Italy in 1962. After a year at Hebrew University of Jerusalem, he studied economics at Bocconi University in Milan (B.A., 1982) and Harvard University (Ph.D., 1988), where he specialized in macroeconomics and international economics. He joined the economics faculty at Yale University in 1988 and taught there until 1995, when he moved to New York University. He also served as a visiting scholar to the International Monetary Fund (IMF), was a research associate with the National Bureau of Economic Research (NBER), held single-year terms on the White House Council of Economic Advisers (1998–99) and at the U.S. Department of the Treasury (1999–2000), and cofounded (2004) the consulting firm Roubini Global Economics. Roubini spent much of his early career studying countries that experienced extreme economic failures, such as Mexico (in 1994), Thailand and other countries associated with the 1997 Asian financial crisis, Russia (1998), and Argentina (2000). He determined that each shared one common element: a massive current account deficit.(www.britannica.com)

Nouriel Roubini is the Chairman and CEO of Roubini Macro Associates, LLC, his own global macroeconomic consultancy firm. He is also a professor of economics at New York University’s Stern School of Business. Dr. Roubini has extensive policy experience as well as broad academic credentials. From 1998 to 2000, he served as the senior economist for international affairs on the White House Council of Economic Advisors and then the senior advisor to the undersecretary for international affairs at the U.S. Treasury Department, helping to resolve the Asian and global financial crises, among other issues. The International Monetary Fund, the World Bank and numerous other prominent public and private institutions have drawn upon his consulting expertise.

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Tuesday, August 3, 2010