Las Vegas is a metaphor for the broader economy

Ernst and Young has an annual Builders CFO conference, to which I was invited to speak. It was in Las Vegas. Overall, the experience was terrific: I enjoyed interacting with the audience during the breaks, and E&Y was kind enough to put me up in the Encore Hotel, which has very nice rooms. And now that I live on the West Coast, I am coming to appreciate the efficiency of Southwest Airlines.

This has been my second trip to Vegas this year, and I can't help but be astonished by its, well, soullessness. It is a city whose core value seems to be to separate people from their money. People are lured by the (false) possibility of getting rich quickly. As the cabbie that drove me to the airport noted, service is not important to people here, because there is an assumption that relationships are ephemeral.

It is therefore no accident that Las Vegas' social indicators are poor. Nevada (three quarters of which lives in Metropolitan Las Vegas), ranks among the bottom quartile of states in life expectancy and population share with a bachelor's degree. It now appears that the spectacular growth in population and employment in Las Vegas was a chimera.

And so perhaps it was with the US financial sector. The sector's share of profits and GDP reached unprecedented--and clearly unsustainable--levels. The profits were also a chimera. Investment banks held junior tranches of mortgage backed securities that paid spectacular returns--so long as the mortgages remained current. But quarterly, and even annual, profits did not reflect a reasonable expectation about the long term performance of the assets. Part of the problem was that mortgages were originated independent of relationships--including even relationships with rigorous automated underwriting.

I can't way I saw this coming--I did not. But the ex post similarities between Wall Street and Vegas (beyond the old shibboleth that they are both casinos) is striking.