Resident Fellow Desmond Lachman

Sir, It would be wonderful if a solution to the global financial crisis were as plain to see as Nassim Nicholas Taleb and Mark Spitznagel seem to suggest ("Time to tackle the real evil: too much debt", July 14). In their view, all that is basically needed to resolve the financial crisis is an aggressive and systematic debt-for-equity conversion.

In offering their solution, Prof Taleb and Mr Spitznagel gloss over the notion that a modern market economy rests fundamentally on the idea of the sanctity of contracts. Having the government forcibly dictate sweeping debt-for-equity conversions would constitute an egregious violation of that sanctity. This would be bound to have adverse economic reverberations for many years to come, since it would fundamentally undermine trust in the enforceability of loan contracts which in turn would greatly undermine the whole process of credit intermediation.

A second basic point they overlook is that in today's world of widespread loan securitisation, debt-for-equity conversions are no simple matter. For we are no longer in a world mainly characterised by single borrowers having single lenders that can readily voluntarily agree to debt restructuring terms. Rather, we now have a vast multitude of lenders to any single borrower, and these lenders have very different, and very difficult to reconcile, interests in the particular structured loans.

Going down Prof Taleb and Mr Spitznagel's radical path of forced debt-for-equity conversions would in their terms be the equivalent of introducing another black swan into the system. It would seem that we have enough unresolved problems in today's world economy without engaging in another reckless financial market experiment.

Desmond Lachman is a resident fellow at AEI.