While he was considered a tad unorthodox during his lifetime, the economist Hyman Minsky...he once used none other than Donald Trump as a case study. John Jay College economics professor J.W. Mason has a blog post today looking at a 1990 lecture Minsky delivered in which he framed Trump's rise and fall as a classic bubble, similar to those that had blown up and burst in commodity exporters like Brazil and in Japan's insane real estate market. “One of the puzzles of the 1980s was the rapid rise in the financial wealth of Donald Trump, author of Art of the Deal, and what else,” Minsky started, wrly. He continued:
Trump’s fortune was made in real estate. Many large fortunes have been made in real estate, since real estate is highly leveraged. Two factors made Trump somewhat unique—one was that he developed a fortune in a period of high real interest rates, and the second was that the cash flows on most of Trump’s properties are negative.
Trump somehow became a billionaire despite the fact that borrowing was expensive and his buildings lost money. But how?
Trump’s wealth surged because the market value of his properties—or at least the appraised value—was increasing faster than the interest rate. Trump obtained funds to pay the interest no his outstanding loans by increasing the draw under what in effect was a home equity credit line. The efficiency with which Trump managed these properties was more or less irrelevant—hence Trump could acquire the Taj Mahal in Atlantic City without much concern about the impacts on the profits of the two casinos he already owned. Trump was golden—he had a magic touch—as long as property prices were increasing at a more rapid rate than the interest rate not the borrowed funds.
It didn't matter that Trump's empire bled cash, according to Minsky, because the east coast of the United States was in the midst of a giant real estate bubble, and commercial property prices were soaring. As the value of Trump's holdings rose on paper, he could take new loans to pay off his old debt. In this sense, he was a lot like the sub-prime borrowers in 2005 and 2006 who relied on infinitely increasing home values and regular refinancings to keep themselves afloat.
Of course, Trump's property values couldn't skyrocket forever. And just as Mexico and Brazil sailed straight into debt crises when commodities prices dropped, Trump eventually faced his own reckoning when people started to doubt the inherent worth of Manhattan office towers and Jersey casinos. Writes Minskey: