Margin Call | Power Line

‘If something cannot go on forever, it will stop.” That’s the quote from the late economist Herbert Stein. Some facts to consider:

1. U.S. share of world population: 4%
2. U.S. share of world GDP: 26%
3. U.S. share of world wealth: 29%
4. U.S. share of world debt: 35%
5. U.S. share of worldwide military spending: 37%
6. U.S. share of worldwide foreign aid: 40%

The above figures are not sustainable. Well, actually, they were not sustainable, past tense.

Many will look at the first three bullets above and conclude that America has been exploiting the rest of the world to get rich. In fact, that relative wealth has enabled the last three bullets. Truth be told, bullet #1 is shrinking fast, so bullets #2 and #3 can no longer sustain bullet #4, so bullets #5 and #6 must fall by the wayside.

What’s happening in the world today is that the short-run has ended, we are all living in the long-run.

The classical reference in the headline refers to two Hollywood movies. In the comedy Trading Places (1983), Dan Aykroyd and Eddie Murphy team up to defeat the Duke brothers, played by Don Ameche and Ralph Bellamy, in the futures market for frozen concentrated orange juice.

At the end of the day’s trading session, the Exchange’s president approaches the Duke brothers on the trading floor and declares,

Margin call, gentlemen. You know the rules of the Exchange, Mr. Duke! All accounts are to be settled at the end of the day’s trading, *without* exceptions.

Margin Call (2011) depicts events at an unnamed Wall Street investment bank during a roughly 36-hour period in 2008. The firm decides to conduct a fire sale (dump) of 100 percent of their massive portfolio of mortgage-backed securities. In doing so, the firm triggers a worldwide financial crisis.

Of course, the movie’s characters need to rationalize their horrific actions. A senior trader, played by Paul Bettany, gives a speech justifying the firm’s legerdemain in the housing market. At one point he says (slightly edited),

People want to live like this in their cars and big f—- houses they can’t even pay for. The only reason that they all get to continue living like kings is because we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really f—- fair really f—- quickly and nobody actually wants that. They say they do, but they don’t. They want what we have to give them but they also want to play innocent and pretend they have no idea where it came from.

Applying this speech to the current situation: since the end of World War II, America has been underwriting the rest of the world, putting our hand on the scales in their favor.

The world is about to get really fair, very fast.