Dr. Taleb's book, Black Swan, was a truly interesting treatment of long-tail statistical events and how humans perceive said events. It is unfortunate to see him indulging in so much hand waving in this article.

"For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding $2.2 trillion...... is directly transferred from the American economy to the personal accounts of bank executives and employees"

I don't understand where this number is coming from. According to the data from the 2007 Economic Census[1], the U.S. commercial banking sector employed (approx) 1.6 million employes and compensated them with a total payroll of (approx) 95.8 billion dollars. Total payroll for the finance and industry industries is $502 billion for 6.2 million employees.

What is this $2.2 trillion that he is referring to? In his opening statement, he makes it sound as if this amount is direct compensation, but the actual numbers for the industry make that figure seem unlikely. (I am not an accountant, but I seriously doubt that some type of compensation that doesn't appear on the annual payroll is going to make up the bulk of that difference.)

"That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects"

First of all, this $5 Trillion dollar number is a projection, and projections need to be analyzed critically[2]. Second of all, this is wrong (as pointed out by yummyfajitas elsewhere in this thread). So long as money is not being (quite literally) stuffed into a mattress, it is doing something in the economy. Now whether that something offers benefits over opportunity cost may be a product of market failings and questionable regulations, but that can hardly be blamed on the banking industry.

"It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact \“Black Swan\” events and benefiting from the free backstop of implicit public guarantees."

I think that it is disingenuous to paint the entire industry as being composed of individuals out to cheat the system. I think that it makes more sense to note the behavioral economics at work.

A disturbing number of financial institutions were making money from home mortgage loans. Any financial industry not doing so would be left out of the crowd. Regulations allowed for massive leveraged financial positions to be taken in the market. Financial companies became more and more aggressive (after all, the models say everything is fine, and if we don't play along shareholders will question our financial performance). The bottom fell out and everyone got clubbed (but some worse than others).

There is no great, malevolent force working in finance. The industry was governed by (and possibly still is) some pretty lackluster regulations, but it is a questionable premise to paint the entire industry as willfully fraudulent.

"it also has provided secret loans of $1.2 trillion to banks."

Activity by the Fed is not "secret" but rather it is a matter of public recored: http://www.federalreserve.gov/

(Or, more specifically: http://www.federalreserve.gov/releases/h41/current/h41.htm )

"We don’t believe that regulation is a panacea for this state of affairs. The largest, most sophisticated banks have become expert at remaining one step ahead of regulators"

This is not really the case. It is more the case that the regulators are often underpaid (relative to what they could make in the private banking industry) and over-worked (due to staffing cuts). This creates an accelerated revolving door between the public and private spheres. This revolving door makes it very hard to get any good regulations out of our current institutions.

"A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance."

A well-functioning market would favor the banks that offer the best risk-return ratios. Now whether or not the measure of risk is correct will only be obvious in hindsight, but market outcomes are a product of aggregate information on a grand scale. Exposures, compensation schemes, risk-sharing... These are not the kind of factors that are rewarded in a free-market (unless his definition of well-functioning is some variation of central control).

If you want to institute a change in the incentives within the finance and banking industry, just institute a very, very small transactions tax. This would decrease the viability of trading for its own sake (make enough trades fast enough, have a slightly more than random number of successes, and profit).

It wouldn't fix everything, but if you are a critic of the current structure of the industry, then a small transaction tax is the thing that is most likely to move the industry further away from the temptation to function like a glorified roulette wheel.

I'm not even going to address the problems with Dr. Taleb's proposed solution to problems in the banking industry (last three paragraphs of the article). It makes no sense.

[1] 2007 is the most recent data available. It is not the most up to date (the banking sector is likely a bit smaller now), but it is worth using some actual facts and figures. Direct access here (industry code 522110 for commercial banking): http://factfinder.census.gov/servlet/DatasetMainPageServlet?...

[2] http://xkcd.com/605/