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We're suffocating in debt, and the only thing that will get us out is to find a way to deflate...

Jul. 14, 2009 1:21 PM ETBy: Eli Hoffmann, SA News Editor5 Comments
We're suffocating in debt, and the only thing that will get us out is to find a way to deflate it, Nassim Taleb says. His solution: a broad-based debt-for-equity swap; let banks offer homeowners reduced payments in exchange for a stake in their property. Felix Salmon agrees, to a point.

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Comments (5)

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nobby73 profile picture
I made this comment a few weeks ago on the increasing of LTV by the mortgage agencies...

Perhaps a better solution is to allow people to grandfather a portion of their debt, representing the negative equity, which will be converted into a government loan at a rate discounted to Fed Funds, subject to a floor at zero, with a bonus whereby early prepayment of principal will have a multiplier effect, i.e. for every $1 paid down, the amount will fall by say $1.15 (need the level to be somewhere sensible so that people don't try and use credit cards to pay down, but need to pay down this part before the legacy mortgage.)

As the economy improves, and Fed Funds rates rise, then they will begin paying interest on the loan, but this will give the Fed greater control over money supply and inflation. After all, the current almost zero rates only benefit the banks as the increased lending margins.

Simply raising LTVs to 125% fails to address the issue, but hopes if they close their eyes, the problems will go away. You can't have a secured loan on an amount greater than the security. But if we continue in the current direction, with bailouts galore for corporations, with no discernible benefit for households, things are going to get a great deal worse.
Why is no one suggesting the simple approach. Let the failures fail. Let the system work. The big farce today is that government solving the problem keeps most people from blaming the government for the problem. They caused it and now are driving the nail in the coffin just to be reelected.
mb2 profile picture
14 Jul. 2009
Bad idea. Besides, the bank already has an interest in the homes.
j_remington profile picture
Taleb good idea, but too costly to implement.
Clive Corcoran profile picture
The best bit in Taleb's piece in the FT today was the following
"Non-linearity makes the mathematics used by economists rather useless...The same flaw found in risk models that helped cause the financial meltdown is present in economic models invoked by “experts”. Anyone relying on these models for conclusions is deluded."
Not exactly what someone who has had to sweat through an MBA program wants to hear but still "relevant" to our times.
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