Nassim Taleb tells Charlie Rose that we are headed for Capitalism 2.0, in which stock prices are much lower, and banks are treated like public utilities--their job is to run the ATM machines and process payments, but not to take risks.
The Dow Jones is down by almost 40 per cent so far this year but this makes it pretty much the best performing stock market in the world.
Our banking system does appear to be less fragile and better regulated than that of many European countries. Our government-debt-to-GDP ratio is lower than most (although we are trying to rectify that). Some major oil producers, including Iran, Venezuela, and Russia, are hurting. So-called emerging markets seem to act like high-beta stocks. (A high-beta stock is one that goes up really fast in a good market and down really fast in a bad market).
While I do not necessarily agree with Taleb's specific scenario, I do think that we are undergoing a regime shift in finance. I think that asset securitization is the dead parrot.
In my mind, the two important questions about the new pending financial regime are:
1. How will start-up companies be financed? The low stock market really dims the prospects for an "exit strategy" for venture-funded firms. Will we see a shift away from venture funding and toward bootstrapped businesses? If so, then I think that the business models will be much more conservative. VC's swing for homeruns. Entrepreneurs who have to do without VC funding tend to go for singles. That's not necessarily a bad thing. But it would be a shame if total investment in start-ups were to slow to a trickle.
2. Who will take the risks of investing in emerging markets? Private investors will be skittish about putting money in countries where the regime uncertainty is high, meaning that the economic rules of the game could be arbitrarily changed at any point. I cannot imagine wanting to own stocks in Russia, for example. But folks also are becoming skittish about what Hausmann calls "fairly well behaved countries such as Brazil, Colombia, Mexico, Peru, South Africa and Turkey." He seems to advocate having the U.S. government use some of its current borrowing prowess to invest in such nations. He makes a logical case, but it is hard to decide whether he or Tyler ("live poorer") Cowen has the least attractive political platform.