27 August 2009

Targeting the bigger disasters

[A] robust system needs to produce frequent crashes, with citizens immune to them, rather than infrequent total collapses which we cannot cope with. By constraining cycles and assuming "no more boom and bust" (as [the UK] current government did) you end up with a very large bust – and I am sure that I do not need more events like the recent crisis to prove the point. Nassim Nicholas Taleb, 27 August
Experts in process engineering, with whom I've recently talked, have suggested that Social Policy Bonds might well control the smaller, frequent crashes, or their equivalents. In other words, you could use the bonds to, say, reduce unemployment or achieve universal literacy and numeracy. But, they say, that would come at the cost of an increased risk of a bigger problem. My response is twofold: First, we could issue Social Policy Bonds that target as a priority the bigger problems: global catastrophe or major disasters, however caused. Social Policy Bonds are a versatile concept: the exact nature of any disaster to be avoided need not be specified in advance. And second, I point out that the bonds are to be compared with the current system, which as Mr Taleb rightly points out, is geared toward actively encouraging bigger catastrophes.

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