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Europe Making More Progress on Debt Than US: Black Swan

Thursday, 2 Dec 2010 | 2:13 PM ET

Europe is ahead of the United States in its debt crisis in that it at least has identified the problem and is taking steps to correct it, "Black Swan" author Nassim Taleb told CNBC.

Nassim Taleb
Photo by: YechezkelZilber
Nassim Taleb

The two regions differ in that the US instead has chosen to bail out institutions, which Taleb, promoting his latest book "The Bed of Procrustes," said is immoral.

"At least we know that we need austerity there. People can't spend money they don't have," he said. "They're ahead of us in that they have identified the problem further. We over here still don't know that we're living on borrowed money and we're borrowing more."

Taleb spoke as global policy makers are working through a plan to help troubled countries such as Ireland, Portugal and Italy deal with their sovereign debt issues. The debt problems have caused wide swings in the stock market as investors try to get a handle on where the crisis is heading.

The US, meanwhile, is working on a far-reaching plan to cut U.S. deficits and slow the growth of long-term debt. The plan, announced earlier this week by a commission appointed by President Obama, gained crucial support from two key Republican senators on Thursday but remained short of votes needed to trigger congressional action.

Black Swan Wisdom
Nassim Taleb, known worldwide for his book "The Black Swan," discusses his new book, "The Bed of Procrustes," and more with CNBC.

Taleb rose to prominence with this 2007 book in which he cautioned against excessive risk-taking. The title arose from the discovery of black swans that were thought not to exist, and the philosophy espoused in the book cautions investors that such unpredicted events have the greatest consequences.

In his latest piece, he takes Federal Reserve Chairman Ben Bernanke to task for engineering the bailouts of institutions that got into trouble through excessive risk.

Whether the gamble turned out to work in the end is immaterial, Taleb said. The larger point is moral hazard—that Bernanke used the money of innocent taxpayers and investors to rescue those who jeopardized the system in the first place.

"He's trying to bail out those who made mistakes with retirees' money," Taleb said. "We have a subsidy...of those who made a mistake, taking money away from those who are innocent. To me that is immoral...it's beyond unwise.

He advocated austerity measures such as program cuts undertaken during the Ronald Reagan presidency, reasoning that Americans would willingly accept "the pill knowing it's the remedy."

As for those on Wall Street and in Washington who caused the financial crisis, he recommended stiff retribution.

"You need to go after people promoting risk management methods that don't work, that help hide risk and at the same time have no downside," Taleb said. "The best way to get rid of the problem is the captain goes down with the ship—every captain, every ship."

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