Tuesday, Jul 14, 2009
Debt is bad, equity is good?
FT: Time to tackle the real evil: 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.
[...]
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. [...]
Posted by drewster @ 01:07 PM (1222 views) Add Comment
11 Comments
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1. fancypants said...
I see Taleb had a hand in this. I was reading "Fooled By Randomness" on my way to work this morning, and was surprised to see him cite Anatole Kaletsky as being a rare example of a journalist who was not susceptible to being fooled by randomness. Presumably he meant that Kaletsky was being fooled by something far less incomprehensible - like an over-estimation of his own abilities.
2. another alan said...
Kaletsky flip-flops more than (insert something to complete the metaphor, but you know what I mean! He will say something on one day and say the opposite not too long after).
Can anyone post the article here. I can't read it.
3. drewster said...
alan - it works if you enter via Google: Google search for "Time to tackle the real evil: too much debt".
I'm impressed by this article, it makes a lot of sense. However I'm not entirely sure how it could be applied to the real world. For example how would you translate government bonds - the epitome of binary debt - into a more fluid equity model?
4. another alan said...
Thanks drewster.
5. refusetobuy said...
The article's main focus is MW's solution; A debt for equity swap.
6. george monsoon said...
Posted as an article earlier, but nobody has commented..
YOU MUST ALL READ THIS... please
http://a330.g.akamai.net/7/330/25828/20090318195802/graphics.eiu.com/specialReport/manning_the_barricades.pdf
7. mark wadsworth said...
His message is simple, and as it happens, quite correct. When I talk of debt-for-equity swaps (thanks, RTB!) I mean mainly that this is how banks should be fixed (anything is better than taxpayer funded bailout) but the same applies to GM and Chrysler and any other over-leveraged company, and, in the spirit of this article, these crazy LTV ratios of anything more than about 75%.
Don't forget that the Great Depression was largely triggered by people buying shares using borrowed money (which is what the article alludes to when he says the fall out from dot.com crash was negligible as this was all equity being lost, not loan capital, i.e. it was a straight transfer from rich gullible people to cynical traders and wannabe entrepreneurs).
8. Browneconomy said...
George Monsoon,: @ 6 tried opeing link on original post but it 'didn't'. Does work from your link above.
9. hpwatcher said...
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.
Amen......
10. stillthinking said...
How do you fix the price of the equity? Banks can't really take a partial share of a house in exchange for debt because they have no idea what the price should be.
Repossession is debt for equity. Who is going to support that?
11. Fallingbuzzard said...
Interesting article pointing to hyperinflation as the widely perceived likely outcome of Western stimulus packages. That would make deflation, nominal or real, a black swan.