Palo Alto Daily News.com
Tuesday, Dec. 2, 2008
The dark side of credit
Dear Editor: Instead of lending 10 times the value of their underlying assets, investment banks started lending out 30 times their asset value. They were getting colossal quantities of almost free money. “Leveraged buyouts” (LBOs) became the name of the corporate game. Groups of investors would get together, target a company, borrow to buy it, sell it at a profit, and move on. Hedge funds flipped multibillion-dollar companies the way amateur property speculators in California flipped houses.
But it was all based on credit, and the dark side of credit is debt. All of this leveraging works only as long as the underlying assets, the collateral for the loan, retain their value. Using leverage seemed like free money. But when assets decline in value, the ugly side of debt appears in the form of “de-leveraging.”
“And when he had opened the third seal, I heard the third beast say, ‘Come and see.’ And I beheld, and to a black horse; and he that sat on him had a pair of balances in his hand. And I heard a voice in the midst of the four beasts say, ‘A measure of wheat for a penny; and three measures of barley for a penny; and see thou hurt not the oil and the wine’” (Revelation 6:5-6 KJV.).
This black horse’s rider with the pair of balances in his hand symbolizes the rich capitalists who have a major impact on world conditions through their manipulation of national economies. Only one other verse in the Bible pictures a man with balances or scales: “The merchant uses dishonest scales; he loves to defraud” (Hosea 12:7 NIV).
Ted Rudow III,MA