I wrote the following “ten principles” mostly for economic life to cope with the Fourth Quadrant, in the aftermath of the crises.
1. What is fragile should break early, while it’s still small.
Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks become the biggest.
2. No socialization of losses and privatization of gains.
Whatever you may need to be bailed out should be nationalized; whatever does not need a bailout should be free, small, and risk-bearing. We got ourselves into the worst of capitalism and socialism. In France, in the 1980s, the socialists took over the banks. In the United States in the 2000s, the banks took over the government. This is surreal.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
The economics establishment (universities, regulators, central bankers, government officials, various organizations staffed with economists) lost its legitimacy with the failure of the system in 2008. It is irresponsible and foolish to put our trust in their ability to get us out of this mess. It is also irresponsible to listen to advice from the “risk experts” and business school academia still promoting their measurements, which failed us (such as Value-at-Risk). Find the smart people whose hands are clean.
4. Don’t let someone making an “incentive” bonus manage a nuclear plant—or your financial risks.
Odds are he would cut every corner on safety to show “profits” from these savings while claiming to be “conservative.” Bonuses don’t accommodate the hidden risks of blowups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
5. Compensate complexity with simplicity.
Complexity from globalization and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage. It’s the leverage of efficiency. Adding debt to that system produces wild and dangerous gyrations‡ and provides no room for error. Complex systems survive thanks to slack and redundancy, not debt and optimization. Capitalism cannot avoid fads and bubbles. Equity bubbles (as in 2000) have proved to be mild; debt bubbles are viscous.
6. Do not give children dynamite sticks, even if they come with a warning label.
Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore the confidence.”
In a Ponzi scheme, (the most famous being the one perpetrated by Bernard Madoff), a person borrows or takes funds from a new investor to repay an existing investor trying to exit the investment.
Cascading rumors are a product of complex systems. Governments cannot stop the rumors. Simply, we need to be in a position to shrug off rumors, be robust to them.
8. Do not give an addict more drugs if he has withdrawal pains.
Using leverage to cure the problems of too much leverage is not homeopathy, it’s denial. The debt crisis is not a temporary problem, it’s a structural one. We need rehab.
9. Citizens should not depend on financial assets as a repository of value and should not rely on fallible “expert” advice for their retirement.
Economic life should be definancialized. We should learn not to use markets as warehouses of value: they do not harbor the certainties that normal citizens can require, in spite of “expert” opinions. Investments should be for entertainment. Citizens should experience anxiety from their own businesses (which they control), not from their investments (which they do not control).
10. Make an omelet with the broken eggs.
Finally, the crisis of 2008 was not a problem to fix with makeshift repairs, any more than a boat with a rotten hull can be fixed with ad hoc patches. We need to rebuild the new hull with new (stronger) material; we will have to remake the system before it does so itself. Let us move voluntarily into a robust economy by helping what needs to be broken break on its own, converting debt into equity, marginalizing the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here (by claiming restitution of the funds paid to, say, Robert Rubin or banksters whose wealth has been subsided by taxpaying schoolteachers), and teaching people to navigate a world with fewer certainties.
Then we will see an economic life closer to our biological environment: smaller firms, a richer ecology, no speculative leverage—a world in which entrepreneurs, not bankers, take the risks, and in which companies are born and die every day without making the news.
