Tuesday, 10 March 2009

LIBERTARIAN SUS explains the financial crisis . . .

.. in simple terms, with the help of a barman, a paper mill, and an itinerant email): 

susanryder Heidi is the proprietor of a Manhattan bar. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - 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 recognises these customer debts as valuable future assets and increases Heidi's borrowing limit.  He sees no reason for undue concern because he has the promissory notes of Heidi's customers as security.  And the local paper mill (in a public-private partnership) recognises a new use for their printing presses, and collateralises the debts into new drinking vouchers, which –- backed by the govt’s say so -- Heidi uses to pay her suppliers.

The drinking vouchers circulate and they pay for more drinking, and even more drinkers take out even more loans. The bar is booming.

Meanwhile, at the bank's corporate headquarters, expert bankers transform these rampant customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS, which they then sell and trade on markets worldwide. No one really understands what these abbreviations mean and how the securities are
guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items, and become further reserves against which the paper mill prints more drinking vouchers.

One day, although the prices are still climbing, a risk manager of the bank, (subsequently fired due to his negativity), decided that the time has come to start demanding payment in real money from Heidi for the debts incurred by the drinkers at Heidi's bar.

Unfortunately Heidi's customers cannot pay back any of their debts to Heidi. Heidi cannot fulfill her loan obligations to the bank or suppliers, and claims bankruptcy. DRINKBOND and ALKBOND securities drop in price by 95%. PUKEBOND performs better, stabilising in price after dropping by only 80%.

The suppliers of Heidi's bar, having granted her generous payment terms and having invested heavily themselves in the securities are faced with a new and desperate situation. Her wine supplier claims bankruptcy and her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties, and a poignant confession from the head of the paper mill that he had dangerously overestimated the social conscience of drinkers. Between them they came up with a miraculous rescue plan that saves the bank. The funds required for this massive rescue are obtained by depositing several truckloads of drinking vouchers at the bank and calling them money, while levying a new tax on all the non-drinkers.

And then the same thing happened all over again . . . only bigger.

* * Read Susan Ryder every Tuesday here at NOT PC * *


  1. Sus


    Right-O, I need to borrow some Pukebonds (PKB) so I can short the market for pukes. Got any?

    Your story can be extended even further to explain the fine detail of the crisis and who is reponsible for the mess.

    Excellent stuff!


  2. LG: I can't/don't take credit for this as I never intended it to be this week's post!

    It was forwarded to me yesterday & I liked it, so sent it off to a bunch of bods to spread it far & wide ...

    Heidi explains it all rather neatly, don't you think? :)

  3. Sus, any leftover SteinlagerBond available for me to be used at the Manhattan bar?

    Anyway, one of the assets that has been claimed to cause this financial crisis was the MBS (mortgage-backed-securities). These security-types are not going to go away because of the crisis, bankers and financial institutions will re-packaged them and attached some new conditions on the way they're being traded.

  4. If there is any SteinlagerBond FF, it's all yours!

    As for me, I'll search out some SamuelAdamsFutures (nice wee drop from Boston) and then head on down to that centre of international finance, Mexico, for some CoronaKrone .. which, when I first came upon it, you couldn't even get in most of the US, let alone down here.

    At 25c a bottle it hit the spot beautifully -- and then I came home to find it *the* drop in all the yuppie bars in Wgtn -- at Wgtn yuppie bar prices!

    Best of all, I roared with laughter when ....

    (I shall stop there: I feel a story coming on that could be a post one day when I'm scratching for ideas!!) ;)

  5. Very very funny, although a very true story. I will pass this story on because it simply shows and explains the crisis so that a 10 year old would understand it. Thanks for sharing the story.

    Take care, Julie


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