Tuesday, March 03, 2009

Depressions for Dummies

The depression financial crisis explained in simple

Heidi is the proprietor of a bar in Berlin. In
order to increase sales, she decides to allow her loyal
customers - most of whom are unemployed alcoholics - to
drink now but pay later. She keeps track of the drinks
consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing
numbers of customers flood into Heidi's bar.

Taking advantage of her customers' freedom
from immediate payment constraints, Heidi increases her
prices for wine and beer, the most-consumed beverages. Her
sales volume increases massively.

A young and dynamic customer service consultant
at the local bank recognizes these customer debts as
valuable future assets and increases Heidi's borrowing

He sees no reason for undue concern since he
has the debts of the alcoholics as collateral.

At the bank's corporate headquarters,
expert bankers transform these customer assets into
DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are
then traded on markets worldwide. No one really understands
what these abbreviations mean and how the securities are
guaranteed. Nevertheless, as their prices continuously
climb, the securities become top-selling items.

One day, although the prices are still
climbing, a risk manager of the bank, (subsequently of
course fired due his negativity), decides that slowly the
time has come to demand payment of the debts incurred by the
drinkers at Heidi's bar.

However they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and
claims bankruptcy.

DRINKBONDS and ALKBONDS drop in price by 95 %.
PUKEBONDS perform better, stabilizing in price after
dropping by 80 %.

The suppliers of Heidi's bar, having
granted her generous payment due dates and having invested
in the securities are faced with a new situation. Her wine
supplier claims bankruptcy, her beer supplier is taken over
by a competitor.

The bank is saved by the Government following
dramatic round-the-clock consultations by leaders from the
governing political parties.

The funds required for this purpose are
obtained by a tax levied on the non-drinkers.

Finally an explanation I understand.

h/t Neal Boortz

1 comment:

Rose said...

I get it! Linked!