gooter

What Do We Need In 2009? More Failure

Huh?! you sound like a lawyer. Mommy must have got you out of trouble everytime you failed.


On Jan 01 08:34 AM Crocodilian wrote:

> "But Bailout Nation doesn't believe in failure so much anymore."
>
>
> Not clear that that is a true statement. We've had lots of corporate
> bankruptcies, but our system has assumed system-wide leverage that
> was not ready for a severe stress. Add to that, the painful reality
> is that we don't have the systemic resources to process a major failure
> -- say, a GMAC or WAMU.
>
> If you want to "make room for failure" in the system, the system
> architecture needs to be robust. Venture backed firms go bust all
> the time; but they are funded with equity, not debt, and nothing
> much bad happens when a startup become a shutdown. Paradoxically,
> we give significant tax incentives to debt (which is payable out
> of pre-tax income) over equity (which pays dividends out of after
> tax income); we should not be surprised that a whole financial industry
> developed to replace equity with debt. More equity and less debt
> would leave us more room to let things fail.
>
> Second, financial institutions have to be designed to, as software
> architects say, "degrade gracefully". Institutions like the investment
> banks degraded catastrophically-- pull one thread, somewhere in the
> system, and they rapidly fail. Not only do they fail, but as we saw
> with Lehman Brothers, they fail in a way that threatens to force
> the failure of their entire web of business counterparties.
>
> Third, there should never again be such a thing as an "implicit guarantee";
> obligations need to go on the books as explicit, or stay off the
> books and be disclaimed. The bizarre chimera structure of the GSE's
> was a most pernicious contributor to a system that was ambivalent
> about failure.