"Complex Models" did not Cause the Crisis

Arianna Huffington, at Davos, explaining why she passed on attending a series of sessions devoted to dealing with complexity:

"I get that complex models that no one entirely understood got us into the mess we are in...", 

No, those complex models did not get us into this mess. They just obfuscate something very simple that did. As can be explained by any high school student, compound interest leads inevitably to increasing inequality of wealth, because "them that has, gets."

Once a critical mass of people are reduced to debt serfdom by unpayable debts while the rich keep getting richer on unearned income, the economy grinds to a halt, because total debt cannot keep increasing forever. Nothing can.

Even the ancients understood this very simple "economic model", hence the many religious proscriptions against usury, i.e., lending money for any interest at all, not just high rates. One cure for economic strangulation by excessive debt was widespread forgiveness of debts during the Jubilee celebration every 50 years (see Leviticus). (The alternative they sought to avoid was economic collapse and debt repudiation via revolution. Tsarist bonds, anyone?) 

If you think better regulations could have prevented the current meltdown, you do not understand the problem. We are buried under a mountain of debt, and no combination of bailouts, stimulus packages and regulation reform will fix that. Economic recovery will require significant debt reduction via wealth redistribution.

What will have to take place is some combination of widespread debt forgiveness, substantial inflation of the currency, very steeply progressive taxation of both income and wealth plus wealth redistribution, or repudiation of debts via revolution

Take your pick.

Comments

[e-Patient Dave (deBronkart)]

Man, do I love the way you think. Always have. Glad we reconnected.