An analogy

Watching an advert for the banned weight loss supplement the other evening, a similarity stuck me. The product was essentially offering an outcome that could not happen; weight loss without diet and exercise. What occurred to me was that the busted CDOs at the heart of the financial crisis offered exactly the same thing; an impossible outcome of higher returns for lower risks.

Taking the analogy one step further, I saw how finance to the economy is just like food to the body. All economies need finance to survive. But like bodies, they can have too much of it. Financial obesity is perhaps an apt way to describe what the world looked like in early 2007, with too much money sloshing around the great, fat bellies of New York and London. Now the world is in a crash diet, with money scare and everyone trying to slim down their financial weight.

Developing the analogy a stage further, there are good foods and bad foods. Would a nice sensible corporate loan be like a wholesome shepherd’s pie? Would a CDO be the equivalent of a large curry - fun to consume but you don’t really know the damage you are doing to yourself until much later? A hot tech IPO that soars 50% on its first day of trading – perhaps its equivalent would be a jumbo slurpy which gives you a great sugar rush, but you know the slump is coming.

All the bad foods are good fun, in much the same way that it is more fun to be trading equity options than it is to be doing corporate cash management. But the body and economies need a balanced diet of food and finance respectively. With everyone working for hedge funds and trading options, the economy got dangerously fat. Having slimmed down, there needs to be a balanced diet.