Leverage = Credit = GDP

I’ve been reading a lot of The Epicurean Dealmaker and Synthetic Assets blogs this weekend, as well as this article that says Wall Street’s compensation is never coming back (due to Dodd-Frank).

Two summary thoughts:

  • Leverage creates credit. Maybe the way to look at The Thing That Happened In 2008 And Its Aftermath is like this:
    1. Leverage creates credit. Credit is money. Leverage thus creates wealth.
    2. Imagine ∃ three counterparties each lending secured debt to each other (A lends to B, B lends to C, C lends to A). Each of them inflates its book value by marking levered assets at fair market value. They could (under this imagined theory) create more and more credit ad infinitum, as long as B is blind to A’s worth, C is blind to B’s worth, and A is blind to C’s worth.
    3. This could be called “manufactured” or falsidical credit.
    4. Since part of the naughties’ expansion of credit facilitated the extension of credit to American consumers—turning their promise to “getcha back later” for that plasma TV into an asset — bets on which could also be levered and even more money created out of belief (credere).
    5. (Bankers benefited from this because they were minting money.)
    6. Perhaps this is the way to see what’s happened: now all of the credit (money) that was falsidically minted is gone—gone from the bankers’ paychecks, gone from the dentists’ retirement accounts, not-gone from the hands of those who bought durable goods, not-gone from the memories of those who bought expensive meals, not-gone from the cash accounts of those who liquidated their stock holdings (for example maybe some people who converted stocks into bonds upon retiring in 2007), gone from the restaurateurs’ sales numbers, gone from the servers’ tip plates. The plasma TV’s are still inside the McMansions and the houses are still there, but credit—belief—has dried up.

    Credit/money is in a sense merely an idea—shared belief. As Carolyn Sissoko remarks, since it’s hard to say in hard terms what the total value of all equity markets in the world actually represents, perhaps it’s not surprising when this meaningless aggregate falls by 40% in a year.

  • All of the New Yorkers who sustained themselves by serving über-high-class clientèle — working in a high-class bar, escorting, personal assistants, postmodern chefs — are going to feel the pinch, if they haven’t already. It should become harder to pay rent in NYC working a food or hospitality job.


    Over some period of time in the future that will have to mean people either moving even further outside Manhattan or moving back to where they came from. And that should eventually put downward price pressure on every aspect of NYC—rent, food, availability of fine cuisine, and so on.

    Right?

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