25 March 2009

The very best explanation of the financial crisis


1 comment:

  1. Heidi is the proprietor of a well known bar.

    In order to increase sales, she decides to allow her loyal customers, many of whom are unemployed, 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 limit. He sees no reason for undue concern since he has the debts of the drinkers as collateral.

    At the bank's corporate headquarters, experts transform these valuable customer assets into drinkbonds and alkbonds.
    These securities are then traded on markets worldwide. No one really understands what these abbreviations mean, nor 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 (subsequently of course fired due his negative attitude) of the bank decides that the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

    Unfortunately these customers have no money, and are unable to pay back the debts.

    Heidi cannot fulfil her loan obligations and claims bankruptcy.

    Drinkbonds drop in price by 95%. Alkbonds perform slightly better, stabilizing in price after dropping by 80%.........

    The suppliers to Heidi's bar, having granted her generous payment due dates and having invested in the securities are now faced with a difficult situation.
    Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor. The bank is bailed out by the Government, following dramatic round-the-clock consultations with leaders from the governing political parties.

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