A Modest Proposal: Ban Debt!

Levantine doomsayer Nassim Nicholas Taleb, author of "The Black Swan," has been everywhere lately, appearing on a Planet Money podcast last week and then this morning at the New Yorker Summit. (He also co-authored a new research paper.) The upshot of his latest message is extreme: ban debt.

Taleb claims that debt is a risk-enabler. Remember how your financially savvy mother always warned you that bonds are safer than stocks? Well, to Taleb, that's a problem. If I buy a bond, I act as if I'm certain to get that money back, and might continue loaning money elsewhere. When one of those bets (shocker!) fails on me, I have to call in my other loans, and thus trigger a system-wide panic.

Equities (a.k.a. stocks) are, on the other hand, inherently risky; they entitle you to a piece of the profits, but also expose you to business downturns. As Taleb sees it, equity-holders are a lot more cautious about where they put their money.

His proof? The dotcom boom-and-bust was very much equities-driven, and resulted in a mild recession; investors absorbed their losses and moved on. The housing boom-and-bust was debt-led and has, of course, led to a systemwide meltdown. He says:

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

In other words, today's crisis is the result of a) over-leverage and b) "disappearing slack," as Paul Kedrosky puts it. "We live in a world with less slack than ever, whether you're thinking in epidemiological or financial terms (and they are analogous), and that has immense consequences for runs, of whatever variety."

In 2005, The New York Times ran a now-infamous article about the benefits of a slack-free world:

It had been a busy day for Georgia businesses, and FedEx's regular nightly flights from Atlanta to the company's Memphis hub were overbooked with packages. So the local crew made a call to a sprawling, low-slung room here at headquarters, where people hunch over computer screens showing weather maps and flight plans, and asked for help from the five empty FedEx jets that roam over the United States every night.

The recent birth of that small fleet, at a multimillion-dollar price tag, explains a lot about how the nation's economy has become so much more resilient. Think of it as the FedEx economy, a system that constantly recalibrates itself to cope with surprises.

The United States has endured an almost biblical series of calamities in recent years - wars, hurricanes, financial scandals, soaring oil prices and rising interest rates - but the economy keeps chugging along at an annual growth rate of roughly 3 percent.

It has been able to do so with the help of technology that allows businesses to react ever more quickly to changes.

The question I would pose to Taleb and Kedrosky is, at what point does interconnectedness switch from diluting negative shocks, as it clearly is capable of doing, and instead augmenting them?