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Last week, when the world financial system got a spring flu, so did the Urban Man. I also found myself in bed, one moment spiking 104, the next shaking with chills. I also tuned in the BBC at 3 a.m. and fell prey to fever dreams. The markets got a $200 billion shot from Ben Bernanke. Me, I made do with over-the-counter drugs.
Both our problems, it seems, arose from leverage. Leverage occurs when you borrow to make an investment. If you can borrow at 5 percent and invest at 7, then why not? In fact, why not borrow more to invest more and more?
Thanks to massive leveraging and clever derivative side bets, said on British source, Bear Stearns may have amassed positions amounting to some $13.5 trillion before it collapsed …yes, trillion with a T…while it actually owned underlying assets worth $80 billion on a good day. $13.5 trillion is a >big number, big as the entire American gross domestic product: A fever dream of epic proportions.
As for The Urban Man, I had simply been working too hard while getting too little sleep, and it caught up with me. You might say I'd been leveraging my personal health. Both the economy and I pulled drapes against the noonday sun, drank liquids, stared at laptops propped on piles of covers, and tried to control our imaginations.
I tried to forget a few billion virus cells blooming in my body. The market tried to forget $515 trillion in unregulated derivatives blooming within the world financial system.
Derivatives represent a different kind of leverage: an investment in risk, a kind of side bet on reality. These investments hold no inherent underlying value and are often backed only by more side bets. Nevertheless, like clever microbes, they grow with astonishing verve. $515 trillion is about ten times the gross domestic output of the entire globe, or seven times the value of all the world's real estate.
So unreal is the derivative economy that some experts now view it as a "new form of money." And if all those trillions of imaginary equity disappeared you might ask, so what? Wouldn't it be like blowing the fluff off a mug of beer? Wouldn't the beer still be there…underneath?
No one seems to know.
Still, while listening to the commentators, it became apparent that somehow, despite all esoteric finance, the entire world economy had come to depend not on Wall Street geniuses, but on me—or at least, on all dedicated American homeowners: bidding up our properties, paying down our mortgages, and purchasing large consumer items.
Apparently all the rest of the world's efforts were ultimately irrelevant, and if only I would shake off my malaise, leap out of my bed and get back to work, a looming crisis could be forestalled.
Now, despite recent setbacks, the Urban Man believes in leverage as much as the next American. I know it's the average citizen's job to build cities that sprawl out where there is no water, buy larger automobiles as the price of gas soars, support ceaseless wars with uncapped deficits, and purchase as many goods as we can during our short lives.
In fact, maybe we could get the whole financial system out of its funk if we'd all just exercise a little more leverage: each of us borrowing against our luck just one more time.
Like the economy, the Urban Man was feeling a little better today. I splashed some water on my face. I stepped into the sun and stopped by the studio to record. This afternoon I'm planning to go buy a new dishwasher. I figure that small move can be leveraged by some investment banker, somewhere—probably into unimagined trillions of secondary debt and hedged risk, soaring derivative instruments, and prime paper.
And then, who knows, all may yet be well.
Copyright © 2008 Marc Porter Zasada. All Rights Reserved.
Here's some suggested background reading:
- Feds rescue halted a derivatives Chernobyl, Daily Telegraph
- As funds leverage up, fears of ‘The Great Unwind' rise, GATA Institute
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