Comments on: The Bubble in Artwork by 8-Year-Olds

By: AlleyGator

AlleyGator — Thu, 26 Mar 2009 15:21:22 +0000

This sounds like she is intuitively aware of both “lock-in” and consumer price preferences. You get the artwork for free for a weekend, and at the end of the weekend you’re much more likely to simply keep it to avoid hurting her feelings, or to keep it because you are lazy, or because you like it more now than you did.

Additionally, someone who is truly willing to pay 10,000 in real cash will put up the full amount of money, but someone with a slightly tighter budget can pay only half and get it on the cheap.

Pretty smart kid. ;)

By: Keshav

Keshav — Sun, 22 Mar 2009 16:00:29 +0000

I think this is perfectly analogous to the situation with tangible common equity and preferred stock.

By: Manshu

Manshu — Sat, 21 Mar 2009 14:49:36 +0000

James, please try to exert your utmost influence to ensure that little Franny becomes an artist when she grows up and not a banker.

By: j

Sat, 21 Mar 2009 14:31:41 +0000

Friend pays the pretend money and borrows the painting for the weekend.

Friend, of course, sells the picture to his buddy, Peter for $5,000. Peter, of late, has been on a major acquisition trail in the picture market.

Later in the weekend, Friend buys an identical picture from another buddy, Steve, for $3,000. Friend then gives this picture to Franny.

Meanwhile, Peter has a portfolio of pictures, many of which are no more than badly-drawn stickmen. Peter is also very casual about the way he stores the artwork.

But, Peter has a cunning plan. He persuades Moe, Fred, Pat, Rick and Paul to buy a stake in his $50,000 Enhanced High Value Art fund. They in turn…..

By: anonymous

anonymous — Sat, 21 Mar 2009 09:29:00 +0000

The only analogy I could come up with is the relationship between AIG and its creditors: If you put up half of the obligations in cash and half in bonds, they’ll cancel the obligation but if they pay out only bonds, eventually they’ll want all of it cash.

By: Ted K

Ted K — Sat, 21 Mar 2009 04:53:45 +0000

I don’t know exactly what you’re looking for Mr. Kwak, but I think if you “buy” a car directly from the financing department at an auto-dealership it works very much like that. Of course none of them would admit that but they PURPOSELY get people “upside down” on the car. They know they’ll never pay off all the loan, but they make a few high interest payments and in short time the dealership gets the car back and then offer the same type loan to the next sucker they know will never pay it off. It ends up being a lease—but they sell the poor fools in to thinking they will eventually have ownerships. They do the TV ads that last 30 minutes on local TV saying “I want to help the ‘poor joe’ to own his own car” but the dealership just wants to get the high interest rate and just “flip it” (I think that’s the terminology) to the next idiot.

By: GaryD

GaryD — Sat, 21 Mar 2009 04:08:24 +0000

That sounds like two types of mortgages: $5000 in real money plus some pretend money gets you the house while pretend money only (ie. no down payment) lets you enjoy the house for a little bit, but then you have give it back.

By: Ben

Ben — Sat, 21 Mar 2009 02:47:44 +0000

Dear James and Simon,

Let me start by saying I really enjoyed your blog and have learned a great deal. However, I like to offer a constructive critism.

You guys are over simplifying the very important issue of bank solvency. The issue at hand is very much more complex than merely real money vs. pretend money. To be frank, your presentation is a disservice to your readers. I highly recommend you and your reader to read up on the following by John Hempton.

http://brontecapital.blogspot.com/2009/02/bank-solvency-and-geithner-plan.html?showComment=1234834560000

I was elated after I came across on John’s blog and read it. For a long time I tried to get at a deeper truth. The long reading was was time very profitably invested.

Thanks,
Ben

By: alittlehopeinmyheart

alittlehopeinmyheart — Sat, 21 Mar 2009 02:27:44 +0000

The LIBO in LIBOR, but I am sure that Fanny’s picture is worth much more for REAL!