Tuesday, July 14, 2009

Financial Times: "Time to tackle the real evil: too much debt"

A good look by Nassim Nicholas Taleb and Mark Spitznagel for Financial Times at getting our economy back on track by addressing the problem of too much debt.

The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that
we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option.

And while some in Congress have simply tried to "fix" things with various government "stimulus" packages, the authors argue that this is simply making the problem worse.

Invoking the pre-internet Great Depression as guidance for current events is rresponsible: errors in fiscal policy will be magnified by this kind of thinking.


The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity. Instead of debt becoming “binary” – in default or not – it could take smoothly-varying prices and banks would not need to wait for foreclosures to take action. Banks would turn from “hopers”, hiding risks from themselves, into agents more engaged in economic activity. Hidden risks become visible; hopers become doers.

It is sad to see that those who failed to spot the problem (or helped to cause it) are now in charge of the remedy. Just as the impending crisis was obvious to those of us who specialise in complexity and extreme deviations, the solution is plain to see. We need an aggressive, systematic debt-for-equity conversion. We cannot afford to wait a day.

For the full article, visit the Financial Times online.

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