Tuesday, September 23, 2008

The Illiquid Asset (fiction)

I have quite a few illiquid assets in my closet and my basement. One such asset is an old pair of running shoes. They don’t look very good, and it is unhealthy for me to run in them. I know they are illiquid because I have tried to sell them to four people I know and seven strangers with no takers. I have an excel spreadsheet that says the value of the sneakers is $57.

Sometimes I find it enjoyable to lend money to friends and colleagues. For example, Joe wants $50 to buy a present for his son, but right now I don’t have the capital to support that. Since Joe’s problem is a human-interest story, I tell Vanessa, thinking she might now buy the sneakers for $57 (I’m willing to accept 55). I believe my exact words to her were ``Illiquid assets are choking off the flow of credit that is so vitally important to our economy. As illiquid footwear assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.''

Now it gets interesting. Vanessa has the crazy idea that my sneakers couldn’t possibly be clogging anything. She says the real problem is that I actually don’t have money to lend. “Maybe you should get out of the lending business,” she says, “Stick to what you’re good at, like matchmaking for busy under-caffeinated professionals.” I don’t think she gets it. I also don’t think she cares at all about Joe’s problem, but she did mention something about simply lending him the $50 herself. Clearly she fails to understand the complexity of our sophisticated markets. So I hold an auction but no one buys the sneakers; this is a catastrophe for people like Joe. There must be some entity willing to do the right thing and free up this sneaker-constrained capital…

To be continued

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