Archive for September 10th, 2009

A couple of months ago, Nassim Taleb spoke out in Bloomberg about the “reforms” taking place in the financial system under the Obama and Geithner plans. He expressed his disgust and disappointment that not only are governments bailing out failed institutions but the new accounting standards being proposed after the crisis allow for even less transparency in reporting of gains and losses.

Towards the latter part of his interview Taleb briefly touched on a two-tier concept for the financial system: one side solely for utilitarian purposes but very low risk (banks), the other side solely for risk taking (hedge funds). The key to making this system work is that governments will be very protective of the banks for as long as they are not allowed to freely take risk, whilst the hedge funds can take on as much speculation as they wish, but are not subject to bailout. This would reduce moral hazard and would provide a more robust financial system. In a speaking engagement in Germany, Taleb specifically describes this two-tiered idea.

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