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Thursday, March 4, 2010

Drink Now Pay Later!

For those who have difficulity in understanding why the economy is in such bad shape and understanding the complex Derivative Market the following simple explanation may help:

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. She keeps track of the drinks consumed in 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 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 not only having to write off her bad debt but also with losing over 90% of the presumed value of the bonds. Her wine supplier claims bankruptcy, closing the doors on a family business that had endured for three generations, and 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. Source: Email

14 comments:

hbl said...

Isn't it the truth? We need more people like Bunning preaching the temperance message.

Debbie said...

A really stupid idea, but it perfectly explains what has happened in Washington. Very sad.

Debbie
Right Truth
http://www.righttruth.typepad.com

The Born Again American said...

I was jiggy wkith the whole idea right up until that evil banker called in his note...

WAKE UP AMERICA, THERE'S NO FREE LUNCH... (OR BEER)

The Born Again American said...

I was jiggy wkith the whole idea right up until that evil banker called in his note...

WAKE UP AMERICA, THERE'S NO FREE LUNCH... (OR BEER)

TexasFred said...

Ummmm Beer...

Teresa said...

This country is on drunken binge and this must stop!

I applaud Bunning for his efforts.

Mr Pink Eyes said...

That pretty much sums up what happened in terms that most people can understand.

John Carey said...

Ron, excellent post! It breaks down what happened in a clever way. Bunning was right to ask the simple question, how are we going to pay for this. The problem we have now is all the drunks are now lobbying in Washington for more money so they can drink more of our hard earn cash. Very sad.

Snarky Basterd said...

I guess I'd better take up drinking. More.

Good analogy. Thx for sharing.

Ron Russell said...

I does seem John that all in Washington want to belly-up to the bar and then they all scatter when the tab is presented. Reminds me of some old buddies in my drinking days.

banned said...

Excellent description of how it happened, almost as good as this

http://www.youtube.com/watch?v=kEL0g3As2vE&

Except that this programme was aired before the main crash. If you have not seen this vid before, stick with it as it gets funnier and funnier.

Many years ago I had a spell as a semi employed alcoholic, spending as many days down the pub as possible. When I ran out of money the landlord would loan me cash, illegally, to buy booze and cigarettes from him. Sadly for him, when I got back to work I would avoid his pub for a few days until I had raised enough to repay him, meanwhile spending my evenings and money in other pubs.

christian soldier said...

this story maps out the picture that is happening to us in the US...that is for sure!!
C-CS

MK said...

Exactly right, well said.

Maggie Thornton said...

And so goes the story of the housing meltdown. Exactly. Great illustration of personal irresponsibility, Ron.