Explaining Modern Finance And Economics Using Booze And Broke Alcoholics

Tyler Durden's picture




 

Courtesy of reszatonline, who brings us the following allegory by way of Tim Coldwell, we are happy to distill (no pun intended) all of modern economics and finance in a narrative that is 500 words long, and involved booze and broke alcoholics: in other words everyone should be able to understand the underlying message. And while the immediate application of this allegory is to explain events in Europe, it succeeds in capturing all the moving pieces of modern finance.

From reszatonline

Helga is the proprietor of a bar.

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.

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

Word gets around about Helga’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Helga’s bar. Soon she has the largest sales volume for any bar in town.

By providing her customers freedom from immediate payment demands, Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Helga’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 Helga’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.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 “AA” “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 Helga’s bar.

He so informs Helga.

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

Since Helga cannot fulfil her loan obligations she is forced into bankruptcy.

The bar closes and Helga’s 11 employees lose their jobs.

Overnight, DRINKBOND 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 Helga’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 Helga’s bar.

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Fri, 01/27/2012 - 15:13 | 2103401 killallthefiat
killallthefiat's picture

Where is that bar?  I am unemployed

Fri, 01/27/2012 - 15:16 | 2103419 economics1996
economics1996's picture

That sounds about right.  

Fri, 01/27/2012 - 15:24 | 2103461 Dr. Richard Head
Dr. Richard Head's picture

So THAT is what they mean by liquidity crisis.....

Fri, 01/27/2012 - 15:44 | 2103541 Dr. Engali
Dr. Engali's picture

Best comment yet.

Fri, 01/27/2012 - 16:21 | 2103658 FL_Conservative
FL_Conservative's picture

I'll drink to that!

Fri, 01/27/2012 - 16:46 | 2103754 redpill
redpill's picture

Salud!

Fri, 01/27/2012 - 17:46 | 2103965 dwdollar
dwdollar's picture

Good until the last sentence. This:

"The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Helga’s bar."

Should be changed to something like this:

"The funds required for this bailout are taken from generations not yet born. The parents of those future generations don't get angry, but willingly take part in the infanticide for a chance to have their own seat at the handout feed trough, while they allow egotistical psychopathic morons to rule, close their eyes, finger their ears, and say 'Nah, nah, nah...'"

Fri, 01/27/2012 - 18:11 | 2104037 Ayn Rand
Ayn Rand's picture

Add after the first sentence....... and the funds were printed and dropped all over the town by Helicopter Ben and Aunty Angela.

Fri, 01/27/2012 - 17:58 | 2104012 kill switch
kill switch's picture

Explaining Modern Finance And Economics Using Booze And Broke Alcoholics

 

Now this is my kind of post,, Alcohol abuse only happens when you spill it....

Fri, 01/27/2012 - 17:23 | 2103895 HedgeAccordingly
HedgeAccordingly's picture

hilarious 

Fri, 01/27/2012 - 17:55 | 2104002 eatthebanksters
eatthebanksters's picture

And the bartender says," since we have the best customers in the world, Helga is buying a round for everyone...on the house!"

Fri, 01/27/2012 - 15:32 | 2103471 DaveyJones
DaveyJones's picture

Wow, the title is perfect - our economy policies are designed by broke alcoholics  

Fri, 01/27/2012 - 16:43 | 2103730 wisefool
wisefool's picture

Econ PhDs and LLM's tax? I wish these people would have partied more and manipulated less.

Fri, 01/27/2012 - 17:18 | 2103817 bigdumbnugly
bigdumbnugly's picture

from the foster brooks school of economics.  crazy gugenheimer was the prototype and art cashin and his buds are today's disciples.

secret membership password motto is: gin and bear it.

or just plain *hic*

 

Fri, 01/27/2012 - 17:57 | 2104010 eatthebanksters
eatthebanksters's picture

Davos = Drinkathon

Fri, 01/27/2012 - 16:35 | 2103696 candyman
candyman's picture

Abstaining from alcohol for two days is a sign of not having a drink problem, says adviser Sir Ian Gilmore, chair of the Alcohol Health Alliance, said having two "dry" days a week was "a very good indicator" of not being addicted to alcohol.     Comment --  they narrow this down to two hours, I'll be  in the clear !!!

 
Fri, 01/27/2012 - 18:02 | 2104023 blindfaith
blindfaith's picture

Free beer tomorrow.

Fri, 01/27/2012 - 15:18 | 2103433 Rincewind
Rincewind's picture

You know, that might be a good way for a lot sheeple to understand what has been going on.

Fri, 01/27/2012 - 15:34 | 2103493 LetThemEatRand
LetThemEatRand's picture

Except it misses a few very important points.  For example, the bank issued the loans without any concern that they would be paid back because the bank planned all along to securitize the loans and sell them to unsuspecting pension funds.   The bank KNEW the loans were no good, but the bankers took their bonuses on the front end when the loans were originated and again when they were securitized.  The bankers later go on TV and in print and explain that pension funds are really a stupid idea because they are all underfunded after the worthless securities they sold to the pension funds go bust.  The bankers will collect a fee for winding down the pension funds and forcing people to use 401Ks instead, and they will collect fees for starting the 401Ks.  They will then sell overinflated/constantly churned mutual funds to the 401K investor.  Again collecting fees.  Then when the mutual funds go bust, the bankers they will tell everyone they just need to work harder and retire later and they need to stop having an entitlement philosophy.   And then Rush Limbaugh will tell his listeners that higher taxes on the rich bankers will destroy the economy.   And on and on.

Fri, 01/27/2012 - 15:53 | 2103576 flattrader
flattrader's picture

No joke.  Screw this oversimplified nonsense.

Fri, 01/27/2012 - 18:01 | 2104020 blindfaith
blindfaith's picture

NO SOUP for you

Fri, 01/27/2012 - 19:21 | 2104220 greensnacks
greensnacks's picture

The Gallagher's always pay their debts!

Fri, 01/27/2012 - 16:48 | 2103766 francis_sawyer
francis_sawyer's picture

@LetThemEatRand

Bravo! But sorry, that's the version exclusively reserved for ZH'ers...

The rest still get the 'Humpty Dumpty' version...

Fri, 01/27/2012 - 17:31 | 2103920 flattrader
flattrader's picture

Sometimes I think the Tylers believe we all just fell off the cabbage truck coming into town.

Fri, 01/27/2012 - 17:36 | 2103946 francis_sawyer
francis_sawyer's picture

Well I don't know about the rest of you... But I'll vouch for the fact that I DID...

BOOZE-A-NOMICS BITCHEZ!

Fri, 01/27/2012 - 19:44 | 2104283 prains
prains's picture

you can make vodka from cabbage

Fri, 01/27/2012 - 22:53 | 2104773 UP Forester
UP Forester's picture

You can make vodka from sugar, yeast, acid blend and yeast nutrient.

Fri, 01/27/2012 - 16:49 | 2103774 Gully Foyle
Gully Foyle's picture

LetThemEatRand

http://caselaw.findlaw.com/us-1st-circuit/1303010.html

This case involves a once-profitable steel fabricating company, FAMM Steel, Inc. (“FAMM”), that fell on hard times while trying to expand its business.   The company defaulted on its loans, and it was shut down and had its assets liquidated in 2004.   Thereafter, it brought suit against Sovereign Bank (“Sovereign”), which provided the loans, claiming that the bank had caused its demise by forcing it to hire an incompetent financial manager who mismanaged the company's accounts and then engaging in a course of action that exacerbated the problem.   The company alleged the bank was liable under a slew of theories, including an instrumentality theory, breach of the implied covenant of good faith and fair dealings, breach of fiduciary duty, fraud, duress, and interference with advantageous business relations.

The district court granted the defendant bank summary judgment in a careful and well-reasoned opinion.  Gavin v. Sovereign Bank, No. 06-12314, 2008 WL 2622839 (D.Mass. June 30, 2008).   We affirm.   This is our first occasion to deal with the “instrumentality” theory of lender liability.

Fri, 01/27/2012 - 17:57 | 2104011 Xkwisetly Paneful
Xkwisetly Paneful's picture

BTW not one single thing novel here.

First day?

Going into default often results in the lender forcing some idiot down the throat of the borrower,

which then is summarily sued by the borrower for causing the problems.

When of course everyone knows the FAMM steel folks of the world over leveraged themselves to collect dividends, bonuses et al.

 

 

 

Fri, 01/27/2012 - 17:51 | 2103964 Xkwisetly Paneful
Xkwisetly Paneful's picture

Did you mean sovereign funds and not pension funds? Since sovereign funds were lined up double wide around the globe twice buying.

Not that it matters a ton since both are supposedly being operated by grown adults who are professional money managers.

No buyers=no sellerss=no market.

But keep giving those buyers chasing that extra steenth a free pass afterall they were entitled to it.

and not that it matters but the pension funds need no help from anyone to go bust using 8% actuarial assumptions to this day.  Who you going to blame that on?

of course it is the ZH rendition because at ZH countries don't need a banking system, military, food and fuel to operate but they do need 15,000 federal agencies doling out social benefits to the victims of the evil banksters-same victims who oddly enough wall papered their homes in plasmas and filled their driveways with escalades instead of investing in education or something actually useful.

Freest money period ever and yet somehow the borrower at lint like interest is the victim of a scheme to transfer wealth to the ultra rich. If that was the case what was it 30yrs ago when venture capital was 1% a month and 1/3rd of the net? Mortgages, car loans were 12% and credit cards were 30%. What was that considered?  How is it generations paid twice as much interest on mortgages as principal with of course the evil bankster getting his bonus and they actually paid the mortgage.

 

 

 

 

Fri, 01/27/2012 - 17:59 | 2104017 blindfaith
blindfaith's picture

actually, I believe the pension funds expect to be bailled out just like the banks...sorta like Italy after Greece.

Fri, 01/27/2012 - 18:04 | 2104018 LetThemEatRand
LetThemEatRand's picture

When you allow the wolves to feast on the sheep, they will do so.  The sheep do what sheep do.  The wolves do what wolves do.  The middle class has been gutted since Reagan took office and easy money (debt) was given to them to replace their wages.   People were too stupid to realize it.  The 1% got ultra wealthy moving all the good manufacturing jobs overseas and selling the cheap crap back to people who lost their good jobs and went to work at Walmart, by giving them loans that became or will eventually become the responsibility of the taxpayer when the bankers got/get bailed out.   The banker class got stuffed and bloated destroying the fundamental fabric of the country.  Apologize for them all you want.    The fact that the middle class was stupid and allowed it to happen doesn't excuse the behavior of the bankers and CEOs and politicians whom they bought and paid for.  Unless you are a follower of Rand in which case fuck them all let them starve, right?    Kind of like the grifter with his mark.  He sleeps like a baby at night knowing it was the sucker's own fault that he got rolled.

Fri, 01/27/2012 - 20:20 | 2104411 John_Coltrane
John_Coltrane's picture

If you want to understand the real origin of the debt problem and the relationship between banking cartels like the FED read, "the creature from Jeckyl Island".   That work describes the origin of The FED  in 1913 by Fabian Socialists whose symbol is the wolf in sheeps clothing.   But banking cartels orginate much earlier than that.    

And the origin of the public debt is solely unfunded, unauthorized wars like Vietnam (JBJ), Iraq (Bush) etc. combined by FDRs and LBJs social welfare "great society" programs to keep the unproductive masses docile.  The beginning of the solution is Ron Raul, and gold backed currency.  But only the beginning.  The real solution is individual responsibility, a bottom-up phenomena.

Fri, 01/27/2012 - 21:43 | 2104646 LetThemEatRand
LetThemEatRand's picture

Are you serious?  The bankers were Fabian Socialists?    They are fucking oligarch capitalists.  

Fri, 01/27/2012 - 22:08 | 2104694 DaveyJones
DaveyJones's picture

nice comment(s)

Sat, 01/28/2012 - 01:51 | 2105008 StychoKiller
StychoKiller's picture

You type that like "Fabian Socialists" and "oligarch capitalists" are mutually exclusive.  Check your premises.

Fri, 01/27/2012 - 21:41 | 2104637 FrankDrakman
FrankDrakman's picture

somehow the borrower at lint like interest is the victim of a scheme to transfer wealth to the ultra rich

Sure, now that I have a job, I'll just toddle down to my neighbourhood bank, and take out a loan at lint-like rates to pay off those 22% credit card bills I rang up when I was unemployed. Oh? The bank won't lend me any money? But they get to borrow at 0% from the Fed, and charge me 22%? What were you saying again?

Don't cry for me, btw; I only owe about $2,600, and I expect to clear it up soon. But I also wanted to start a business when I was unemployed, and I needed $5k for initial marketing expenses; after that the business would be self-financing. Think they would OK that loan either? Not a chance.

Fri, 01/27/2012 - 17:50 | 2103991 11b40
11b40's picture

It is virtually assurred that is you say anything negative about Rush Drugbo, there will be at least one other right-wing zombie around to give you a junk.  Is that where the label "junkie" comes from?

Fri, 01/27/2012 - 22:15 | 2104704 DaveyJones
DaveyJones's picture

it's almost as if they're criminals.

Now if only former federal prosecutors who specialized in this area thought so

and then all the bankers could possibly do is keep the press from giving these prosecutors camera time 

our president is right, our democracy keeps getting stronger

Fri, 01/27/2012 - 23:11 | 2104809 luckylogger
luckylogger's picture

This is the best comment I have seen on Zero hedge in years.......... you hit the nail on the head and I am in the industry and............ Congrats for saying it how it is. you deserve pariah status !!!!!

Good job !!!!!!!!!!!!!!!!!!!

Fri, 01/27/2012 - 16:32 | 2103690 BGO
BGO's picture

The scenario would have been more realistic if the bankers colluded with insurance companies to create swaps that allowed bankers to bet against the same crap they were selling to their customers.

Fri, 01/27/2012 - 15:20 | 2103438 Gully Foyle
Gully Foyle's picture

killallthefiat

Helga then opens a rooming house for Alcoholics collecting Social Security. She provides them booze laced with poison. Which she charges a premium for.

Once they die Helga grinds up the bodies for pig food and continues to collect the benefit checks.

Eventually Helga buys a small pig farm and three more boarding houses.



Fri, 01/27/2012 - 15:38 | 2103511 francis_sawyer
francis_sawyer's picture

"Soylent PINK"

Fri, 01/27/2012 - 17:31 | 2103919 el Gallinazo
el Gallinazo's picture

Soylent Oink!

Fri, 01/27/2012 - 15:43 | 2103533 flacon
flacon's picture

Soylent Green is people!

Sat, 01/28/2012 - 01:58 | 2105021 StychoKiller
Fri, 01/27/2012 - 15:39 | 2103519 non_anon
non_anon's picture

BYOB

Fri, 01/27/2012 - 16:27 | 2103674 gravedestruction
gravedestruction's picture

"Where is that bar?"

I think it's somewhere in hell, may have been there in 2005 three years before the 2008 bar tabs started.

Fri, 01/27/2012 - 16:39 | 2103710 vast-dom
vast-dom's picture

try dating a lying whore special k-shooting pill popping alchoholic for a few months and the above analogy is that much more freightening... the bottomless pit of disease mendacity and eternal excuses...

Fri, 01/27/2012 - 16:43 | 2103736 economics1996
economics1996's picture

When you are young head #2 rules the day.

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