Wednesday, March 18, 2009

Financial Crisis From an Alcoholic

Pretty good explanation of the financial crisis" Betty is the proprietor of a bar in Alabama. 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 Betty’s bar.Taking advantage of her customers’ freedom from immediate payment constraints, Betty increases her prices for wine and beer, the most consumed beverages. Profits rise.(Betty's kids will go to college)

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 Betty’s borrowing limit. Betty sees this as a great way to expand.He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINK-BONDS, ALKY-BONDS and PORCELAIN GODDESS-BONDS.

These securities are then traded 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.One day, although the prices are still climbing, a risk manager (What the hell is this-he thinks something smells? What a guy) of the bank decides that the time has come to demand payment of the debts incurred by the drinkers at Betty’s bar.

However they cannot pay back the debts.Betty cannot fulfill her loan obligations and claims bankruptcy.DRINK-BOND and ALKY-BOND drop in price by 99%. PORCELAIN GODDESS-BOND performs better, stabilizing in price after dropping by 90 %.

The suppliers of Betty’s bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, 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.The funds required for this purpose are obtained by a tax levied on the non-drinkers,paying customers of other bars,cigarette's,phone service,electric services,road tolls,and increased traffic citations.

Betty opens a new bar with a grant from the stimulus package for a study of why people become alcoholic's.

Finally an explanation I understand…" I think I need another beer.(just put it on my tab)

As a previous business man my motto was "Never let a customer owe you more than you can afford to lose" , AND NEVER BORROW FROM A BANK.Worked for me for 45 years.

Maybe when the smoke clears and we can start over I'll open another business on a "cash" only basis-What a novel idea. Just kidding. I'll be on the homestead trying to survive.

1 comment:

HermitJim said...

Hey Tony...that's a pretty good analogy to me! I can see how similar to what's going on this really is!

Very interesting post!