*Mary is the proprietor of a bar in Dublin. She realises that virtually all
of her customers are unemployed alcoholics and, as such, can no longer
afford to patronise her bar. To solve this problem, she comes up with new
marketing plan that allows her customers to drink now, but pay later. She
keeps track of the drinks consumed on a ledger (thereby granting the
Word gets around about Mary’s „drink now, pay later“ marketing strategy and,
as a result, increasing numbers of customers flood into Mary’s bar. Soon she
has the largest sales volume for any bar in Dublin .
By providing her customers’ freedom from immediate payment demands, Mary
gets no resistance when, at regular intervals, she substantially increases
her prices for wine and beer, the most consumed beverages. Consequently,
Mary’s gross sales volume increases massively. A young and dynamic
vice-president at the local bank recognises that these customer debts
constitute valuable future assets and increases Mary’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 DRINKBONDS,
ALKIBONDS and PUKEBONDS. These securities are then bundled and traded
security markets. Naive investors don’t really understand that the
securities being sold to them as AAA secured bonds are really the 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 are still 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 Mary’s bar. He so informs Mary.
Mary then demands payment from her alcoholic patrons, but being unemployed
alcoholics they cannot pay back their drinking debts. Since, Mary cannot
fulfill her loan obligations she is forced into bankruptcy. The bar closes
and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The
collapsed bond asset value destroys the banks liquidity and prevents it from
issuing new loans, thus freezing credit and economic activity in the
The suppliers of Mary’s bar had granted her generous payment extensions and
had invested their firms’ pension funds in the various 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 multi-billion euro no-strings
attached cash infusion from their cronies in Government. The funds required
for this bailout are obtained by new taxes levied on employed, middle-class,
non-drinkers who have never been in Mary’s bar.
Now, do you understand economics in 2010?*