Taleb’s Fix for Housing: Convert Debt to Equity

Nassim Taleb, the author of the Black Swan and Fooled by Randomness, has a proposal to fix housing: Convert most of the debt to equity:

“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.”

The entire piece is worth a read . . .


Time to tackle the real evil: too much debt
Nassim Nicholas Taleb and Mark Spitznagel
FT, July 13 2009

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