How can we de-risk the economy?

May 5, 2009

The first panel at the New Yorker Summit featured Nassim Taleb and Bob Shiller. Shiller was placed, uncomfortably, in the role of defender of the status quo, saying that experts can be useful, that economics is a good thing, and that even the SEC has good people who are actually succeeding in making the world a better place.

Taleb, of course, has no time for such things: he said that economists crashed the economy, and that one shouldn’t give them the opportunity to crash it again. In a nutshell, Taleb says that we have far too much debt: “our level of debt is an indication of our faith in experts”, he said, adding for good measure that “debt creates instability and wars”.

Taleb’s solution is a massive conversion of debt to equity, not only in the corporate world but also in the world of housing. That, he says, “would restart the economy on a solid basis”, and he’s even weirdly hopeful that it wouldn’t make investment banks rich.

Shiller liked that idea, and said that there is a proposal out there that systemically important financial institutions issue regulatory convertible debt, which automatically converts to equity on a regulatory event. Is that related to Steve Waldman’s IACCPE? I think they’re close cousins, in any event, and that more thinking along these lines is a very good idea.

But Taleb goes much further. He said that bank runs are much more dangerous now than they were in 1980, because they’re much more instantaneous, and that therefore even 1980 levels of debt “are intolerable today”:

We have to be a lot more careful going forward, because we have globalization, the internet, and operational efficiency — which cannot accommodate debt.

It’s a compelling story, which has zero chance of being adopted by bankers, regulators, politicians, or CFOs. Taleb’s a very useful person to have around, taking a corner position, but the likes of Shiller and Waldman are better at being more constructive when it comes to sketching out how we can react in the real world.


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