The
simple guide to what went wrong in Europe
Helga is the proprietor of a bar.
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 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 recognises 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 drinkers in Helga's bar as collateral.
Helga, flush with borrowed money,
gives in to the increasing demands from her employees and dramatically
increases their rates of pay and installs what are the community's best working
conditions.
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 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 Helga's bar.
He so informs Helga.
Helga then demands payment from her
alcoholic patrons, but being unemployed 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 and all their accumulated entitlements.
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 DRINKBOND 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.
I trust that clears it up for you?
