A Lesson in Economics that Even I Can Understand

Before we move on to the topic of the day, I want to communicate with some of my blogging buddies out there. Some of you now have your comment sections guarded by a word recognition device that consist of two words. One word is easily discernible but the second word is, for me, impossible to decipher. So, if you are wondering why I haven’t been commenting at your sites, it is because I can’t and not because I haven’t tried. (For example, this is why AOW, Silverfiddle and republican Mother that you are not seeing my comments. Rest assured I do read your posts every day.)

Now by way of Frankenstein Government, Zero Hedge and ultimately via reszatonline  I bring you a remarkably clear lesson in economics and finance. I think you are going to enjoy this:

Helga is the proprietor of a bar.

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.

Helga keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans).

Word gets around about Helga’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Helga’s bar. Soon she has the largest sales volume for any bar in town.

By providing her customers freedom from immediate payment demands, Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Helga’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 Helga’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.These “securities” then are bundled and traded on international securities markets.

Naive investors don’t really understand that the securities being sold to them as “AA” “Secured Bonds” really are 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 still are 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 Helga’s bar.

He so informs Helga.

Helga then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.

Since Helga cannot fulfil her loan obligations she is forced into bankruptcy.

The bar closes and Helga’s 11 employees lose their jobs.

Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Helga’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the 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 multibillion dollar no-strings attached cash infusion from the government.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Helga’s bar.

It doesn’t get much clearer than that, does it? Pass it on, my friends. Who knows maybe we can even educate the liberals with this story. Or maybe not.

Well, that’s what I’m thinking. What are your thoughts?

Categories: Uncategorized

24 thoughts on “A Lesson in Economics that Even I Can Understand

  1. Unfortunately, you describe a malady that does not just affect liberals. It is human nature to shield oneself from the consequences of ones actions and to eternally believe in something for nothing.

  2. That’s how it works!
    I loosened up my comment moderation as far as blogger will let me, anyway. We’ll see how that works out, because I have a hard time with those captcha things and I have perfect vision!

  3. Jim,
    I’m not only accommodating you. I have eye troubles too — nothing as bad as yours, but still.

    I don’t know why Blogger makes “improvements” that are worse than the original format. **sigh**

  4. What’s interesting is that the people in the scenario are stupid, but the scenario is not catastrophic, until the bonds are created and rated AA. Yet, the only people who walked away with money in their pockets (aside from the people rescued by the bailout) are the people who created the BS paper and sold it.

    The catastrophe wouldn’t have happened with Limited Purpose Banking. Right Jim? Why aren’t people listening to Kotlikoff?

  5. Explained quite easily, however i doubt liberals will get it. They don’t really want to get it.

    How are your eyes Jim, sorry i haven’t kept track, last i remember you were taking a long break from blogging after your operation.

  6. And thanks for letting us know about the word recognition thing, i turned mine off, it’s also been driving me crazy on other blogs.

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