Monday, March 17, 2008

Economics 001

Read the financial news today and you see line after line about Bear Stearns, et al, selling off their “assets” to pay debts. What are those “assets” that they are selling?

Well, suppose you need some money and you have a 1977 Ford Escort that you have paid off years ago. The car doesn’t run, and one tire is flat, but you own it free and clear. You come to me and ask me to lend you some money and I agree to lend you, say, $50,000 or so. I want some collateral and a promise to pay, so we write up a piece of paper that says you will repay the money and that if you don’t then you will turn over that car (which is worth about $80 not $50,000) to me.

You then take the car to a junk yard, where it is compressed along with 24 or more others into a huge block of steel. That is not legal, because I have a lien on the car, but it doesn’t affect me financially because that car was not part of my asset base.

That piece of paper that you signed is my asset.

A promise to pay $50,000 backed by an $80 car is an asset. Did you notice a complete absence of anything in our discussion about the borrower's ability or willingness to repay the loan?

Now you know everything you need to know about our economy.

1 comment:

  1. Anonymous2:25 PM

    I noticed it was Econ 001 not 101 - but you addressed that before. And yes, that is exactly why the financial situation is the way it is. And so many are pointing fingers at the other person /bank /etc. for shame...