the downturnaround

The Stephon Marbury Model of Economic Recovery

These days, all the talk is about the Swedish model of nationalizing the banks and saving the economy, and we have to admit, we like the sound of that. It makes us think of, well, Swedish models.

But as popular as it is with economists (those who don’t work for the government or a bank, anyway), the Swedish model clearly isn’t catching on with the public. We think we know why this is. Never mind the yuppie-hipster love lust for Swedish fashion, Swedish pop music, Swedish furniture, and Swedish fish. Nothing has ever become massively popular with the American public purely on the basis of being described as Swedish.

So the Downturnaround would like to introduce a new, more comprehensible model of economic recovery, named for former Knicks point guard Stephon Marbury. Yeah, we know he’s not terribly popular, but give us a second.

Look at it this way: The NBA is the economy and the Knicks are a huge, troubled bank. Marbury, entering this season, represented a toxic asset. A seriously toxic asset, like a fresh-built cul de sac ghost town in Nevada. He was owed $21.9 million on the remainder of his contract, a monstrously inflated figure based upon faulty forecasts of his potential value.

But like most toxic assets on bank balance sheets today, Marbury was not completely worthless. He was just worth a lot less than his assigned value (a.k.a. contract). Other teams would take him, just like somebody will eventually move into those lonely desert homes, but only at a steep discount. The question, as it is with everything these days, was how steep.

The market was not good. Other NBA teams were tightening their belts, and recognized that the Knicks were in a tight spot, so there was no point in offering anything approaching fair value. The price would just continue to drop. And so the Knicks were stuck. They didn’t want to give away a potentially valuable asset for way below its value. On the other hand, the longer they let the situation fester, the less valuable Marbury became.

Eventually, however, the Knicks all but gave up. To be free from his contract and sign with another team, Marbury gave back a sliver of his deal ($1 million), plus an agreement to drop his grievance over the $400,000 in fines the Knicks had levied for his refusal to play. A smidgen of honor and a few bucks were saved.

Thus the Knicks did what the banks have been resisting. They wrote down the value of their toxic asset. They ate the loss. Yum!

We can only hope that the banks’ problems are not quite of this magnitude. Including the fines, the Knicks managed to recover just six cents on the dollar of their remaining investment in Marbury. Banks may have assets that are worth that little; they may have some that are worth zero. But in all likelihood, the vast majority of writedowns won’t have to be that extreme. If they are, then it’s game over — the federal taxpayer is the proud new owner of the U.S. banking system.

But this wouldn’t be the Downturnaround if we dwelled on that. Our parable gets better.

Why? Because Marbury then signed with the Celtics, and could very likely end up playing a meaningful role in their run at another championship (he performed well in his first game). The NBA, which in this scenario, remember, stands for the economy, benefits from Marbury’s return from exile. Rather than being wasted in accounting limbo, the talents of a gifted basketball player are put to their good and proper use.

At the start of the season, the Marbury situation looked very dire, and for the Knicks, the solution was harsh medicine. But they are healthier for being rid of their most toxic asset — unfortunately, they do still have Eddie Curry — and can face their next daunting challenge, which is betting the future of the franchise on the possibility that LeBron James will leave the Cleveland Cavaliers, who under NBA rules can offer him a contract worth roughly $30 million more than the Knicks can. Risky? Sure, but that’s capitalism, baby.

The Stephon Marbury Model of Economic Recovery