Heidi's bar, or how the financial system works

Tim Leyland tjleyland at yahoo.com
Wed Oct 5 22:40:16 BST 2011


The clearest explanation yet ...  ?




Heidi is the proprietor of a bar in Detroit. 

 She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. 

 To solve this problem, she comes up with a new marketing plan that  allows her customers to drink now, but pay later.

 Heidi keeps  track of the drinks consumed on a ledger (thereby granting the customers'  loans).

Word gets around about Heidi's "drink now, pay later"  marketing strategy and, as a result, increasing numbers of customers flood  into Heidi's bar. Soon she has the largest sales volume for any bar in  Detroit .

By providing her customers freedom from immediate payment  demands, Heidi gets no resistance when, at regular intervals, she  substantially increases her prices for wine and beer, the most  consumed  beverages.


Consequently, Heidi's gross sales volume increases  massively.

 A young and dynamic vice-president at the local bank  recognizes that these customer debts constitute valuable future assets and  increases Heidi's borrowing limit.

 He sees no reason for any undue  concern, since he has the debts of the unemployed alcoholics as  collateral!!!

At the bank's corporate headquarters, expert traders  figure a way to make huge commissions, and transform these customer loans  into DRINK BONDS.

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 "AAA 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 still are climbing, a  risk manager at the original local bank decides that the time has come to  demand payment on the debts incurred by the drinkers at Heidi's bar.   He so informs Heidi.

Heidi then demands payment from her alcoholic  patrons, but being unemployed alcoholics they cannot pay back their  drinking debts.

Since Heidi cannot fulfil her loan obligations  she is forced into bankruptcy. The bar closes and Heidi's 11 employees  lose their jobs.

Overnight, DRINK BOND 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 Heidi's bar had  granted her generous payment extensions and had invested their  firms'  pension funds in the BOND 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 Heidi's bar.




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