Shameless C&P
dummies guide to financial crisis
Helga is the proprietor of a bar.
She realises that virtually all of her customers are
unemployed alcoholics and, as such, can no longer afford to
patronise her bar.
To solve this problem, she comes up with a new
marketing plan that allows her customers to drink now, but
pay later.
Helga keeps track of the drinks consumed on a ledger
(thereby granting the customers' loans).
Word gets around about Helga's 'drink now, pay later'
marketing strategy and, as a result, increasing numbers of
customers flood into Helga's bar.
Soon she has the largest sales volume for any bar in
town.
By providing her customers freedom from immediate
payment demands, Helga gets no resistance when, at regular
intervals, she substantially increases her prices for wine
and beer, the most consumed beverages.
Consequently, Helga's gross sales volume increases
massively.
A young and dynamic vice-president at the local bank
recognises that these customer debts constitute valuable
future assets and increases Helga's borrowing limit.
He sees no reason for any undue concern, since he has
the debts of the unemployed alcoholics as collateral!
At the bank's corporate headquarters, expert traders
figure a way to make
huge commissions, and transform these customer loans
into DRINKBONDS.
These 'securities' then are bundled and traded on
international securities markets.
Naive investors don't really understand that the
securities being sold to them as 'AA Secured Bonds' really
are debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and
the securities soon become the hottest-selling items for
some of the nation's leading brokerage houses.
One day, even though the bond prices still are
climbing, a risk manager at the original local bank decides
that the time has come to demand payment on the debts
incurred by the drinkers at Helga's bar. He so informs
Helga.
Helga then demands payment from her alcoholic patrons,
but being unemployed alcoholics they cannot pay back their
drinking debts.
Since Helga cannot fulfil her loan obligations she is
forced into bankruptcy. The bar closes and Helga's 11
employees lose their jobs.
Overnight, DRINKBOND prices drop by 90%. The collapsed
bond asset value destroys the bank's liquidity and prevents
it from issuing new loans, thus freezing credit and economic
activity in the community.The suppliers of Helga's bar had granted her generous
payment extensions and had invested their firms' pension
funds in the BOND securities. They find they are now faced
with having to write off her bad debt and with losing over
90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the
doors on a family business that had endured for three
generations, her beer supplier is taken over by a competitor
, who immediately closes the local plant and lays off 150
workers. Fortunately though, the bank, the brokerage houses and
their respective executives are saved and bailed out by a
multibillion dollar no-strings attached cash infusion from
the government.The funds required for this bailout are obtained by
new taxes levied on employed, middle-class, non-drinkers who
have never been in Helga's bar.
Now do you understand?
