Suppose you give me a million dollars with the instructions, "Investthis profitably, and I'll pay you well." I'm a sharp dresser -- whynot? So I go out onto the street and hand out stacks of bills to randompassers-by. Ten thousand dollars each. In return, each scribbles out anIOU for $20,000, payable in five years. I come back to you and say,"Look at these IOUs! I have generated a 20% annual return on yourinvestment." You are very pleased, and pay me an enormous commission.
Now I've got a big stack of IOUs, so I use these "assets" as collateralto borrow even more money, which I lend out to even more people, orsell them to others like myself who do the same. I also buy insuranceto cover me in case the borrowers default -- and I pay for it withthose self-same IOUs! Round and round it goes, each new loan becomingsomebody's asset on which to borrow yet more money. We all rake in hugecommissions and bonuses, as the total face value of all the assetswe've created from that initial million dollars is now fifty timesthat.
No comments:
Post a Comment