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Mary is the proprietor of a bar in Dublin . 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 new marketing plan that allows her customers to drink
now, but pay later. She keeps track of the drinks consumed on a ledger
(thereby granting the customers loans).
Word gets around about Mary's "drink now, pay later" marketing
strategy and, as a result, increasing numbers of customers flood into
Mary's bar. Soon she has the largest sales volume for any bar in
Dublin .
By providing her customers' freedom from immediate payment demands,
Mary gets no resistance when, at regular intervals, she substantially
increases her prices for wine and beer, the most consumed beverages.
Consequently, Mary'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 Mary'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 Mary's bar. He
so informs Mary.
Mary then demands payment from her alcoholic patrons, but being
unemployed alcoholics they cannot pay back their drinking debts.
Since, Mary 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 Mary'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
euro 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 Mary's bar.
Now, do you understand economics in 2010?
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 new marketing plan that allows her customers to drink
now, but pay later. She keeps track of the drinks consumed on a ledger
(thereby granting the customers loans).
Word gets around about Mary's "drink now, pay later" marketing
strategy and, as a result, increasing numbers of customers flood into
Mary's bar. Soon she has the largest sales volume for any bar in
Dublin .
By providing her customers' freedom from immediate payment demands,
Mary gets no resistance when, at regular intervals, she substantially
increases her prices for wine and beer, the most consumed beverages.
Consequently, Mary'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 Mary'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 Mary's bar. He
so informs Mary.
Mary then demands payment from her alcoholic patrons, but being
unemployed alcoholics they cannot pay back their drinking debts.
Since, Mary 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 Mary'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
euro 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 Mary's bar.
Now, do you understand economics in 2010?