I am currently reading – among other books – “Parrot and Olivier in America“, a novel by Peter Carey which is based on Alexis de Tocqueville‘s travels to the early United States of America and his research for “Democracy in America”.

I would like to share the following excerpt which is a nice literary explanation of (some of) the reasons behind the recent housing bubble and ensuing credit crisis in the US.

It is a conversation between Olivier de Garmont, the visiting French aristocrat, and Mr Peek, a New York banker, taking place while they are riding through Manhattan in Mr Peek’s coach and recounted from M. de Garmont’s perspective. Mr Peek just explained to the surprised Frenchman that he would loan money to anyone who wanted to buy or build a house, which M. de Garmont finds rather foolish.

“The business of land in Manhattan,” Mr Peek said, “is mathematical. I am a mathematical man. It is my hobby and my interest, and I do not mean arithmetic. Do you read Mr Newton’s calculus, sir?”

“I know of it.”

“Well, first the A plus B. Arithmetic. Immigration to America increases thirty thousand persons annually. Seventy per cent of these immigrants come through New York.”

“I understand.”

“Then you understand too quickly. The workers stay close to jobs, the people with the money are moving out, here and here, farther from the city. Now can you read what I have written?”

It was follows: h(t) = Xitß.

“The first equation,” he said, “expresses the quantity of housing (in logs) as a linear function of the attributes X of housing unit i.”

Blah-blah, I thought. What this means I do not know except it has a nasty smell of freemasonry – the strange symbols, the mathematics, their use in the service of a prophecy.

“You could predict the price – Xit – of a Manhattan lot in any given year.”

A farmer spouting calculus. That is what it is like with Americans. The moment you think you understand a man’s character, then you are a foreign fool.

Ph(t) = -δt   ßT = 0.

“It is Greek to me,” I joked.

“Ah but it is Greek,” he said, the autodidact.

“But no matter what the equation, it makes no sense to lend money to a debtor who will almost certainly default.”

“Ah,” said he, “spoken like a banker. Spoken like my good friends who are busy lending money to each other, but your painter will pay me back for a year, for two years, for three years. I will do very well. The moment she defaults why it is back to Ph(t) = -δt   ßT = 0. The land is worth a fortune. I have a house on Sixteenth Street and then I make money again.”

And there you have both the explanation for the credit crisis, and an example for the witty tone in which this novel is set. I have tried to find anything about this subject in Alexis de Tocqueville’s “Democracy in America”, but have been unable to do so. If you know of a chapter where M. de Tocqueville addresses the issue of banking or of loans, please let me know.