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FatalWishes
Administrator
Posts: 7493
Registered: 6/24/2004
Location: Fort Worth Texas
Member Is Offline
Points: 144611
Mood: Aging Cynic
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The recession explained in layman's terms
Heidi is the proprietor of a bar in Detroit . She realizes that
virtually all of her customers are unemployed alcoholics and, as such,
can no longer afford to patronize her bar. To solve this problem, she
comes up with a new marketing plan that allows her customers to drink
now, but pay later.
Heidi keeps track of the drinks consumed on a ledger (thereby granting
the customers' loans). Word gets around about Heidi's "drink now, pay
later" marketing strategy and, as a result, increasing numbers of
customers flood into Heidi's bar. Soon she has the largest sales volume
for any bar in Detroit .
By providing her customers freedom from immediate payment demands,
Heidi gets no resistance when, at regular intervals, she substantially
increases her prices for wine and beer, the most consumed beverages.
Consequently, Heidi's gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that
these customer debts constitute valuable future assets and increases
Heidi'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, ALKIBONDS and PUKEBONDS. These securities are then bundled
and traded on international security markets.
Naive investors don't really understand that the securities being sold
to them as AAA secured bonds are really the 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 are still 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 Heidi's bar. He so
informs Heidi.
Heidi then demands payment from her alcoholic patrons, but being
unemployed alcoholics they cannot pay back their drinking debts. Since
Heidi cannot fulfill her loan obligations she is forced into
bankruptcy. The bar closes and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%.
The collapsed bond asset value destroys the banks liquidity and
prevents it from issuing new loans, thus freezing credit and economic
activity in the community. The suppliers of Heidi's bar had granted
her generous payment extensions and had invested their firms' pension
funds in the various 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 multi-billion dollar
no-strings attached cash infusion from their cronies in Government.
The funds required for this bailout are obtained by new taxes levied on
employed, middle-class, non-drinkers who have never been in Heidi's bar.
Now do you understand?
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DanG
Administrator
Posts: 7046
Registered: 6/30/2004
Location: SW FL
Member Is Offline
Points: 145896
Mood: Stunned Amazement
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perfect.
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posted on 2/17/2010 at 17:03
