This was forwarded to me and appears to be a pretty good description of how the Wall Street geniuses got us into this situation.
Heidi is the proprietor of a bar in Berlin. 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 recognizes these customer debts as valuable future assets and increases Heidi’s borrowing limit.
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 DRINKBONDS, ALKBONDS and PUKEBONDS. 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 of the bank, (subsequently of course fired due his negativity), decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi’s bar.
However they cannot pay back the debts.
Heidi cannot fulfill her loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better,stabilizing in price after dropping by 80%.
The suppliers of Heidi’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.
Finally an explanation I understand…
J. Robert Verbesey, Naples, FL
Is Capitalism a flawed system?
To take your question, of course capitalism is a flawed system. You’re dealing with human beings, and nothing says “flaw” like homo sapiens. However, I’ve yet to hear of a scalable system that works any better…
This was quite helpful. If you follow through with the analogy, it appears that the whole chain is at fault, starting with Heidi, who was not too smart to give away her product on unsecured debt, but then the banking system and stock market got involved and from there it was simply corporate greed that took over. They HAD to know what they were doing was stupid, but did it anyway because it was all about the money. I think we should have let the whole system go bankrupt and start all over again.
I was a real estate agent during the time the “no doc” mortgages began. I’ll never forget the first meeting we had with a mortgage lender telling us clients could now get mortgages with out showing proper documentation of income. We were in disbelief, yet no-one wanted to speak up and say anything. Finally, one of the agents meekly said, “but isn’t that illegal”. The lender rep said no, not at all, but we all agreed it didn’t sound like a smart lending practice. The problem with it was that it became the new way to help clients buy homes, in order to compete, most mortgage companies used the practice. It seemed to me that the “no doc” and the “no money down” offers, as well as the “interest only products” caused home prices to rise dramatically because people could afford more house for there money. I watched the whole thing happen, in disbelief all the way. I knew it was going to crash, it was simply not sustainable. I saw the incomes these people had, and comparing it to what I knew I could afford in my own household budget, it was obvious that it was all a fairytale. And it had a very sad ending for many people, the foreclosure notices in the local paper says it all.
As far as the mechanics of the meltdown itself, I think it’s a good analogy.
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p>I have a bit of a problem with the substitution of drinkers/alcoholics for home buyers. The public doesn’t have much sympathy for people with this addiction.
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p>As foolish as many of the financing arrangements were, most of the public had accepted a certain level of trust in banks. Most people know that excessive drinking is bad, but who told the public that banks should not be trusted?
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p>Maybe a store selling vitamins that make people feel healthier would be a better analogy.
sound a lot like “toxic assets”.