Tuesday, July 14, 2009

Taleb Proposes Debt For Equity Swap

In today's Financial Times, Nassim Taleb (with Mark Spitznagel) lays out what could loosely be referred to as a "solution" to our current economic predicament; defined by Taleb as essentially the over-agglomeration of debt. As a remedy, Taleb proposes that a vast conversion of debt to equity take place. As he explains further:

"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."

Most intriguing for our purposes is the contrast drawn by Taleb between the current, balance sheet driven recession, and the equity based dot-com collapse at the turn of the millenium. The obvious differences in terms of degree of severity between the two situations is evidence for Nassim that equity is far more suited than debt to absorb the unpredictable shocks that will define the coming era of economic progression.

Nassim certainly has some good ideas, however we aren't sure that anybody powerful will benefit from the above proposal; potentially rendering a good idea useless.

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