Andrew Ross Sorkin: evaluation

Transcript context

…But surely, it’s begging the question to say that the debt is inflating the prices. If the homes really are going to be worth much more, to borrow to buy a house is exactly the thing you ought to do, at least if you don’t have to sell the next year. The people who borrowed money were the right ones. The Negative Nellies who panicked in 2008, 2009 — they were the wrong ones. They got the prices wrong. Still seems true to me. Let me try something out because I feel like I may be losing this debate with you, but I’m going to try. If you go back to 1929, parallel to 2008 is actually, I think, apt. It wasn’t that the people were selling their stocks out of panic or fear. That’s not what was happening. They were selling the stocks because they had taken out too much money and had too much leverage. So, when stocks fell by November 13th of 1929 by 50 percent from their high, it wasn’t just that the equity value had dropped by 50 percent. It was that they were levered 10 to 1. The bank had called them and said, “Excuse me, you need to pay us.” Therefore, they had to liquidate not just their stocks, but oftentimes their homes. A very similar kind of scenario played out in some ways in 2008 with the subprime mortgage and loans because people’s homes were underwater. They didn’t have enough money to pay the mortgages. I think that, again, leverage plays a very unique role in all this. The prices may ultimately be right in a long-term way, but how you get to those prices and how people could afford to even pay them the first time around can undermine the value in these temporary moments. There’s no doubt particular people were too levered, say, in the ’20s, but the US economy as a whole, it seems, was less levered then than it was in most of the post-war era. I’ve looked for different estimates of total debt as a percentage of GDP. I’m not sure any of these are reliable, but I came up with something like 165 percent — government, private, corporate, everything — which is higher than average for that time but not crazy high. But again, certainly particular people made big mistakes, as is true all the time.…

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