Will somebody with some influence in the real world please read Nassim Nicholas Taleb’s book best seller “The Black Swan.”  And act on it.  If no one does, then we will continue to be plagued by financial meltdowns and deep offshore well disasters for which we are unprepared.

Taleb, son of a Lebanese family prominent since the Ottoman Empire and a native of Amioun, Lebanon, is a New York University professor of Mathematics.  He describes his life’s work this way: ”I am interested in a systematic program of how to live in a world we don’t understand very well — in other words, whil e most human throught (particularly since the enlightenment) has focused us on how to turn knowledge into decisions, I focus on how to turn lack of information, lack of understanding, and lack of ‘knowledge’ into decisions — how not to be a ‘turkey’.” 

Taleb asserts that our current tools of assessing risk are not only inadequte, but often flat-out wrong.  We don’t properly acknowledge the impact of “highly improbable” events on our lives and, as a result, we get blind-sided.  These unusual, yet more frequent than we understand, events are symbolized by the “Black Swan,” — a swan Europeans didn’t know existed until seen in Australia. 

As our markets slide from the latest “Black Swan” visit, consider this little factoid, and comment, supplied by Taleb.  “In the last 50 years, the ten most extreme days in the financial markets represent half the returns.  Ten days in fifty years.  Meanwhile, we are mired in chitchat.”

Basically, Taleb maintains that the best way to approach risk assessment is to watch what actually occurs in the real world, and then work from there.  This “bottom-up,” empirical approach results in more accurate tools of risk assessment.  It doesn’t eliminate “Black Swan” events, it just makes us better able to prepare for them–even profit from them.

Right now financial market movers and shakers, from economists to bank presidents and politicians, are making decisions based on theories that are “top down” ones designed in sterile classrooms.   These theories are elegant, and mathematically impressive, Taleb acknowledges.  Their authors are undeniably bright and well educated and some are Nobel prize winners.  They are also incredibly wrong.  In a world that is very risky and often unknowable, failure to prepare for what we don’t know, and aren’t likely to know, is an inexcusable mistake.

Taleb’s credentials go beyond his academic training.   He’s a no-nonsense mathematician who has worked on Wall Street.  Unlike most on Wall Street, or anywhere else for that matter, Taleb is also a philosopher who has devoted much of his adult life studying a wide range of knowledge.  He already has one non-fiction best seller “Fooled by Randomness,” to his credit and his literary skills are highly developed.

But math is his surgical instrument.  And he explains it in a way that is understandable even to the math-challenged.   That the concepts he presents are not incorporated into modern portfolio theory is a tragedy.  Why these ideas are not being widely used is unfortunate human nature, something Taleb spends time acknowledging and explaining.  Humans are not all that independent, even the brightest among us.  We all need confirmation.  We see what we need to see to confirm our points of view.

Interestingly, Taleb found like-minded thinkers not on Wall Street but in Washington at the Department of Defense.  When it comes to the security business, keeping a wary eye towards what is not known is a given.  DoD calls it the “unknown, unknown.”

Unknown or not, Taleb’s approach is practical and practicable.  Given our current straights, it’s time we started keeping a much better eye on the “Black Swan.”

Who knew banking was such a risky business?  It appears that the current crisis has, in effect, wiped out much if not all of the banking profits made during the past decade–or longer!

The Treasury has aggressively stepped in to backstop all the risk that’s been imbedded in bank assets due to the housing market/debt bubble that’s still undwinding daily.  But even with the Treasury’s $700 billion what still remains is the stark fact that banking can be prone to excessive risk taking.

That has to be fixed, or at least dramatically moderated going forward.  Otherwise we will simply continue to experience these meltdowns and the pain they invariable cause for everyone, not just direct bank investors.

Washington Mutual investors were wiped out totally within hours by government fiat.  For the short term at least, that would cause anyone who thought of investing in banks to wait–to not invest.  The only thing currently propping up all banking is depositors.  These are the liquid assets that fundamentally create banking to exist as lending facilities.

Federal regulators must demand a strict adherence to some conservative liquidity ratios to lending.  And it must strictly enforce regulations prohibiting bank’s from buying anything but the most transparent and secure investments.   So where do riskier ventures go to gain funds if banks become that risk-averse?  After all, these risky investments sometimes produce huge profits.  Billionaires are made from them.

That would be Wall Street.  But Wall Street now isn’t the Wall Street of even a week ago.  Investment banks have been taken over by so-called “regular” banks.  The regulation that put a glass wall between investment firms and banks, Glass Steagall, was eliminated in 1999.  It’s taken 9 years for the commingling of the two to result in the inevitable bubble and crash.  In the near future Beezer believes some form of Glass Steagall will have to be reinstated.

Bottom line.  Banks make money in small increments.  They get interest on loans, and hopefully, repayment of principal.  But making small amounts in a regular fashion means one bad, horrible event can wipe out a bank in short order.  That’s happening now because banks ended up with volatile investments.

Wall Street, on the other hand, is in the business of taking small losses regularly, but then taking huge profits occasionally.  It’s the opposite of banking.  It’s a risk-taking business.  Banking is a risk-averse business.   Or at least we assumed that’s what the banks were doing.

So what happens next?  Banks will have to return to being banks, not investment houses.  The deposit base will have to be protected at all costs.  Over indebted banks will have to be put down.  Some bank investors will lose all their money.  This is hardly the first time that’s happened, even in the past 30 years.

And a whole new appreciation of debt will be learned by everyone.  It’s a lesson that will be painfully taught for many years to come as a result of the debt used by almost all Americans the past 10 years. 

The lesson is going to include, Beezer believes, unemployment well over 10%.  Intermediate term (3-5 years) poor performance by almost all financial securities except some debt instruments as interest rates climb to force high leverage ratios down.  

As this inward-looking atmosphere gains hold, no doubt enemies of capitalism will be emboldened.  The probability of military conflict, Beezer believes, will be quite high.  It may, in the end, turn out that the only thing saving America from a deep Depression is its military presence in places where there’s oil.

For the intermediate term, it would be wise to keep your debt low, but your powder high.

It’s popular right now for those in “middle America” or those in the “middle Class” to point their fingers of blame at Wall Street excesses in constructing risky mortgage financial products that have failed.  But let’s list all of those who benefited from this excess.  You know, just to be honest about the mess.  Everyone on the list that follows is to blame.

First consider where all the billions of dollars pumped into the housing market actually went.  On whom were all these dollars wasted?

Homebuyers primarily, of course.  All the homes built were not built only in Manhatten and Washington.  They were obviously built all over America.  Most of them now occupied by persons of the middle class or working class in middle America.  And who is apparently not able to afford the homes in which they now reside?  That would be the middle class/working class in middle America.  They benefited the least, of course, because now they have to figure out how to pay off their debt–or suffer the pain of walking away from it all and having their credit ruined-for a long time.

Homeowners who cashed out benefited from inflated prices.  Obviously the home building and home renovation industry benefited.  Not all the homes purchased were new.  Many people, a good portion of them people whose children are gone and no longer need a home (and may be thinking of moving to warmer climates, as an example), benefited.  Realtors benefited.

Our consumer economy benefited.  Many of the homeowners found that, as their houses initially rose in value, they could spend some of this unrealized appreciation on anything their hearts desired.  And their hearts desired very much.  There are a long list of winners here–from electronic game makers to automakers to everything in between.

And where was all this money coming from?  From Wall Street, where the primary business is the making and selling of securities.  Wall Street was more than up to the task, obviously, as it made fortunes securitizing all this home mortgage-based money and selling the securities to investors all over the world.   A good portion of these investors are sovereign funds of less than-free countries, such as China, who needed to recycle the current account surpluses made by exporting goods to over-mortgaged America.

So put all the above on the blame list.  And add a few more.

Our regulators dropped the ball.  Excesses were ignored, at best.  Our Treasury and Federal Reserve deserve a fair share of blame because they’ve been printing money like there’s no tomorrow in order to satisfy America’s spending habits, including the spending habits of Congress and the President.  Said government spending, it must be noted, is primarily aimed at subsidizing various portions of America, such as the retired and the elderly.

So we’ve all just had a wonderful time.  And now the bill is starting to be realized.  As it goes in life, some people in the right place at the right time, made a ton of money.  But just blaming them for the problem is incomplete and misleading. 

Many, many Americans benefited from all of this.  That the few who warned of the bubble were ignored is not surprising.  Nobody likes a party poop.  The simple truth is that there’s plenty of blame to go around, including all those new homeowners who overstretched their incomes.

Which is not to say the proposed $700 billion bailout is the way to go.  Beezer likes the idea that the broken banks be put down, with the “good” part of their businesses sold to the better capitalized and better managed banks.  As for the mortgages, let private investors with cash (they are certainly there, eager and waiting) come in to make competing bids.  If they are considered too low, then put in place programs to “work out” troubled mortgages including expedited bankruptcy.  Meanwhile just sit on the loans.  Time is on the side of these loans.  Right now fear and loathing has their resale prices dropping rapidly, and no doubt too far down.

As for the blame game.  Let him without sin cast the first stone.

You gotta love this country.

Only in America can you have a third generation naval officer and fighter pilot square off with a Harvard professor named Obama in a Presidential election.  Only in America can you have the Vice Presidential candidates be a likeable gasbag senior US Senator and a gun toting, female, Governor of Alaska, America’s largest state geographically and one rich in resources.

Compare these two teams to most of the rest of the world, where leading contenders for power are often related by blood and consecrated by religious leaders who, in effect, are trust fund babies who inherit their religious power by birthright.

Ours is a messy process of open debate bolstered by public votes.  Their’s a predictable process of inheritance bolstered by the midnight visit of state police.

America is naturally prone to periodic excess.  We occasionally suffer the consequences of our unbridled optimism and are forced to re-learn that freedom is not free, and our freedom works best when we collectively remember our responsibilities.

The professor and the fighter pilot.  One the super confident thinker, the other a master of surprise.  This is the nation of diversity writ large and lively.

Where to next in this country under a “shovel of stars,” wrote Carl Sandburg?

“We’ve been here before,” said my 87 year old aunt Rita, a daughter of the Depression.  “It will take a while, but we will come out of it better and stronger.”

Take heart America.  Wisdom has spoken.

John P. Hussman, Ph.D., manager of the Hussman Funds writes interestingly about why Treasury Secretary Paulson’s proposal for a $700 billion bailout is flawed and should not be supported.

Hussman believes the best way to actually get banks back into business is to separate the “good” bank from its underwater assets through an expedited bankruptcy where another, healthier bank could take over the “good” bank operations.   Any taxpayer money involved would be senior to both the bank shareholders and bondholders, so no bailout there under Hussman’s regime.

Although all the details aren’t known as of this morning, this looks a little like what has actually happened with JP Morgan’s takeover of Washington Mutual.  This buyout leaves uncovered WAMU’s shareholders and bondholders, as Hussman recommends in his recent market newsletter.  Hussman writes about having an “expedited” bankruptcy, but even his recommendation looks slow compared to the government’s swift takeover and sale of WAMU late yesterday evening.  Early reports were that WAMU’s executives were completely unaware that the government was about to put them out to pasture and sell the “good” parts of WAMU to JP Morgan.

Heck, JP Morgan wasn’t even a traditional commercial bank until a couple days ago!  Say what you will about this administration’s regulatory regime, these swift and decisive moves are impressive.

Hussman also argues that taxpayers shouldn’t take equity but instead should take precedence over shareholders and bondholders.  In addition he recommends a series of steps allowing homeowners some relief from plunging home values, while also providing some compensating relief to lenders by letting them participate in a property’s eventual longterm appreciation.

If the WAMU takeover is any indication, what Hussman recommends, at least in part, is now being executed in fact.

Congress may dither and debate, but it looks like the government is going ahead anyway.  Based upon the crisis condition we’re in, this swift action is probably necessary.  As for bank shareholders and bondholders, those invested in banks that are weak aren’t going to be protected if the WAMU move is as portrayed.

As for the larger picture, it’s still very muddled.  Internationally, it’s hard to determine where things are headed.  One thing is certain.  Currency inflation, followed by recession and a bubble burst in an asset class (read property), means trouble ahead.

If you want some ideas about what to do, try Energy & Capital or Martin Weiss’ commentary.

There’s plenty of money around the world, but people in charge of lending it out have become more conservative as the global economy slows down.  Putting the brakes on lending is a natural, and wise, reaction to slowing economic conditions. 

This caution is reflected on the other side of lending–borrowing.  Here again, it’s only natural that businesses trim their sails as sales are trimmed.

So why the contraction this time?  For the usual reasons, plus a few additional ones.  Too much liquidity makes it possible to overshoot prudent lending limits.  The real bubble created is one of debt, the unchecked growth of which runs beyond the point where it creates new jobs or increases productivity.

Add to that the world’s collective, and seemingly overnight, realization that the basic energy we use to power the world needs to be changed.  Add to that the tremendous growth of gambling methodologies that became so popular in financial markets the past 10 years and you have a very toxic cocktail indeed.

A lot of people will point blame at various sectors, most notably the short selling crowd in Manhatten and London, and cry “greed.”  And they would be right to do so.  But the real tool these folks used to churn markets to their advantage was fear, not greed.

There’s an old saw about someone entering a broker’s office with a suitcase full of money.  This person sits down at the broker’s desk and places the suitcase within easy reach of the broker and says “There’s millions of dollars in this suitcase.  I’m going to give it to you to invest.”  What the broker is then feeling can be called greed.

The potential client then pulls out a loaded revolver and says “If you lose any of my money I will shoot you dead.”  The broker is now feeling fear.  Ask yourself which is more powerful:  Fear or Greed?  Short sellers in effect pull out the revolver by putting the worst possible face on a situation, any situation, and thereby creating fear in investors’ minds.  Lax regulatory oversight compounded the problem by allowing short sellers to operate in secrecy and to leverage their own funds dramatically.  Read the article by Cliff Mason on CNBC’s Mad Money section.

Finally, the last component was a super liquid, digitally quick, worldwide financial market running full blast only to trip over a very important asset that plods along slowly:  Property.  You just can’t turn property into a digital trade very efficiently.  The value of a piece of property is truly known only when it is sold, or someone defaults on their ownership and it is seized.

Right now sovereign bankers and regulators are struggling to overcome the immediate crisis by removing from bank balance sheets as much of this property-related debt as they can.  US Treasury Secretary Paulson, and Federal Reserve Chief Bernanke have proposed a $700 billion purchase of property which, they believe, will calm roiled financial markets. 

An interesting point in all this is the concept, a fiction really, that property values can be accurately assessed at any given point of time without an actual sale being made.  Without an actual sale, It’s always a guess, at best.  Yet bank balance sheets, and many banks derive a good portion of their income financing property, are expected to ”mark to market” all the property on their balance sheet as though the property was a piece of paper, a common stock.  Use this fiction and more than a little fear mongering and you have a bank balance sheet that implodes–at least on paper.

It appears that the Paulson/Bernanke proposal will be passed by Congress, with some changes that are not likely to be substantive.   Is this a good thing?  Nobody really knows.

Some observations.  When too much debt is a main reason creating an economic downturn, then debt reduction is in order.  Debt is either paid off, or written off at a loss.  If the $700 billion buys property at 50 cents on the dollar, it will have reduced debt as well as reducing bank balance sheets and their lending capacity.  It will reinforce, Beezer believes, the natural tendancy of bankers to be more conservative in an economy that’s struggling to make ends meet.

If the $700 billion buys this property debt at face value what’s the point?  Wouldn’t it be less expensive simply to eliminate, or modify, the accounting fiction of “mark to market” on bank balance sheets?  If left alone, banks would, sale by sale or default, take the hit on a contracting property market.  This would take time but it would be more consistent with how one arrives at an accurate property value.

If people are prosperous and wages are strong, the likelihood that they will pay off their debts is increased.   Particularly if they become more conservative in taking on more debt.  An economic contraction that increases unemployment increases the likelihood the debt will not be paid off, but will result in defaults.

Beezer believes the government should infuse productive industries both with funding and with tax incentives.  If the industries also help the country change its energy mix away from foreign sources, so much the better.  Productive debt creates jobs and wages.  It creates the likelihood that property debt will be successfully retired as opposed to being seized. 

As for the $700 billion property debt purchase.  Sit on it.  Work it through over time.  Time is always on the side of property values.  After all, property isn’t renewable.