comment I posted on Winterwatch

Winterwatch:

I believe that another way to look at the credit crisis is that buyers of debt are still learning that their paper (ABCP, MBS, CDO, CLO, etc.) is not backed up by sufficient capital, but rather by fictitious capital. They paid for an income stream that may not exist secured by collateral that is insufficient to prevent substantial losses. In every credit cycle, there is a boom in which easy credit supports overpricing of collateral. When the vicious cycle collapses under its own weight, the opposite happens. First, creditors call in loans. Then they stop lending. The terms are tightened, and rates go up. There is a reason why banks preferred to move assets off-balance-sheet and issue ABCP to finance this. I suggest you read Soros “The Alchemy of Finance” for a more complete explanation of what happens. IMHO.

I am very flattered by Russ's reply:

Comments 8, 10 and 13 nail the concept of fictitious capital,
perhaps even better than me.

(my comment was #8)