Debt the New Equity - Major Economic Dislocation

In 2008, the financial world as we know it changed. Many of the principles we were taught were invalidated, it seemed. Save for retirement and live happily ever after was the conventional wisdom.  Then the market crashed! In his book The Age of Turbulence, Alan Greenspan discusses the importance of the rule of law in a healthy economy.  Dr. Greenspan notes that the vast majority of business transactions go through normally because of trust and the "rule of law." But what if the rule of law changes such that the circumstances under which normal commerce is undertaken become disrupted? In Michael Lewis's book, The Big Short: Inside the Doomsday Machine, he effectively questions the very assumptions under which businesses evaluated risk, particularly credit default swaps. Yet the sudden increases in debt forgiveness, starting with the GM bankruptcy, have wrought havoc with the traditional understanding of debt versus equity, of stocks versus bonds. Students had been taught that...(Read Full Article)

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