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Issue #707: Systemic risks exist

Issue #707: Systemic risks exist

Apr 1, 2020
Marty's Ƀent

Issue #707: Systemic risks exist

If anything, this crisis is proving that systemic risks exist and there is a pressing need to create an incentive system that reduces this risk considerably.

"Show me the incentive and I'll show you the outcome." - Charlie Munger

The outcome laid out in the quoted tweet above is completely predictable, as our friend Tuur points out, if you understand the incentives of the system. In an overleveraged bubble economy built on a foundation of debt; the incentives are consumption and growth at all costs. This is the incentive because if these actions and goals aren't achieved, the system collapses on itself due to the inability to service the interest on the debt that's been accrued. Couple this reality with the fact that in recent decades, governments and central banks the world over have agreed to step in and provide bailouts to those who take too much risk and you have a recipe for a catastrophe at some point.

If every corporation is convinced that Uncle Sam or the Fed is going to step in and save them from their obscene risk taking, corporations are going to engage in obscene risk taking. This typically means loading overextending with debt, creating very risky financial products that are levered to the gills, and conning the Common Man out of his hard earned soft money. The risk taking that the corporations and the financial system engages in tends to blow bubbles that sucks money away from the Common Man.

The systemic risk that is created by this incentive system does not allow for slowing down in any part of the economic chain. As we can see in the particular example laid out above, people have been so incentivized to consume and go into debt instead of save that when you try to secure one link in the chain during the slightest hiccup in economic activity, it causes the other links to deteriorate quickly. Granting renters a "rent holiday" forces the property owners into bankruptcy. Granting the property owners a "mortgage holiday" forces the banks into bankruptcy. This is applicable in many more markets beyond the housing market.

Eventually, everyone is going to need a bailout, which means more debt, which means more theft via inflation, which means a speeding up of the doom cycle that ends in an inevitable collapse of the whole system.

It's time to make money great again so we can fix these problems. This doesn't mean debt won't exist in the future. It means the prospect of a bailout won't be on the table, which will incentivize people to reduce risk, which will reduce systemic risk throughout our economy.

Final thought...

Writing with your sleeping child on your chest is a great feeling.


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