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Liquidity Versus Solvency—Deconstructed for TwentySomethings—Part II

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AP

Last November, the economist Nouriel Roubini Tweeted: "Greece & Ireland are solvency not liquidity."

Roubini seemed to be making the case—with ruthless brevity—that the looming crisis was more serious than many European government officials wanted to admit. And that things were about to get worse.

He was right: Portugal finally fessed up to its insolvency crisis—and admitted the need for a bailout—this week.

Back in November, I wondered about how to best convey the differences between liquidity and solvency. My conclusion was that—like other concepts in economics—liquidity and solvency were best described metaphorically.

I searched for an analogy to capture the poor planning, ludicrous assumptions, and bad behavior that had led to the crisis—and settled on using the metaphor of my own life during my twenties.

And so Part One of 'Liquidity Versus Solvency—Deconstructed for TwentySomethings' was born.

Solvency Crisis

In November, I summed up a liquidity crisis thusly:

"Think of it this way: A liquidity crisis is when you have to call your parents and ask them for a couple of hundred bucks to help cover the rent. Short-term. It's a terrible phone call to have to make. You put it off as long as you can. But while it's a pretty bad situation-there's no denying that-it could be a lot worse for you."

Well, it's gotten worse.

You can't simply call your parents on the phone to borrow a couple of hundred bucks during a solvency crisis.

No, a solvency crisis demands that you get on a train and go home to see your parents in person. You have to level with them. You need to admit that after you lost your finance job— after the housing bubble popped—you had to take a new position in another field at half the salary.

At the time, you told your parents that you were sick of working in finance anyway. Tired of the long hours. Tired of drinking every night at Brother Jimmy's with guys you didn't really like. Tired of everything. You said that you were moving on to greener pastures. But the truth is that for the last few months you've basically been temping.

You hasten to add that losing your job at the bank wasn't your fault: Not even kind of.

(You lost your job because of the mortgage meltdown: Because of some other guys' bad ideas. It's not that you're immune to bad ideas. In fact, you've had quite a few yourself. But, on the continuum of terrible ideas, you could never dream up something as awful as the following: Why not essentially stop doing cash flow analysis on a borrower's creditworthiness—and instead just make massive momentum bets on the value of the underlying collateral, then securitize it and sell it all off in pieces? And then—just to keep the game interesting, just for smiles—lever up everything at thirty-to-one. In your twenties, you simply lack the audacity and vision to conceive of a bad idea of that magnitude. Not in your wildest dreams. Not even on your drunkest summer day at the Jersey Shore. But I digress...)

What you've now realized, as you contemplate your insolvency, is that you're not just seriously late on that month's rent—you're falling further and further behind every month. Even after charging everything else on credit cards, you still can't mail the rent check anywhere near the first of the month. You don't even open your Chase Visa bill anymore: You've missed so many payments that you're convinced Jamie Dimon has hired a couple of goons to rough you up.

And the hole just keeps getting deeper.

You know you need to change your life in a big way. Which is why you're about to tell your parents that you're moving to Queens—and getting at least two roommates. Astoria is kind of cool these days - and what's really so great about living in Yorkville? Besides, living in Queens is really a better solution for everyone involved than moving back home and taking up residence in a basement in Jersey.

The reality is that times have gotten pretty grim: You're actually spending the quarters you saved for laundry on pizza—and washing your socks in the sink.

Part of the problem is that you can't believe your old life is over. Whether it's the fiction of zero capital requirements for banks in Euroland—or your own ability to throw a small fortune overt the bar at Provocateur—nobody ever wants to admit that the party is over.

This is what you're thinking about as you begin to explain your predicament to your father.

You can see the realization spread across him slowly. The kind of money you need to borrow this time can't just be retrieved from his dresser drawer. You're not just illiquid—you're insolvent.

(At this point, your mother leaves the room.)

What makes you really nervous is that your father doesn't raise his voice: He lowers it: "How much do you need?" he asks.

That's when you realize it: You have no earthly idea how far into debt you've gotten.

If you were thinking clearly—if you weren't so ashamed—you might have been able to say that not knowing how much you need is not an uncommon phenomenon, given the circumstances.

You could explain that it happened to the largest banks in Ireland, after all.

But instead you silently unzip your backpack and dump it out. You watch as the bills cascade down, many with the envelopes unopened, until papers in every color of the rainbow litter the kitchen table.

Miraculously, you survive that awful moment—easily one of the worst of your life—without actually dying of embarrassment.

(Just ask José Sócrates.)

On the train ride home—with the bailout check in your pocket—you think about how the hot tears scalded your cheek when you had to explain to your parents how bad things had gotten. You tell yourself it was all for theatrics: Crocodile tears for their sympathy.

But in your most secret heart you know you weren't lying to them: You were only lying to yourself.

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