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