A Dummies Guide To What Went Wrong In Europe

[h5kaf]

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

,

in

a ledger, of the drinks consumed (thereby granting loans

to the customers).

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

l

argest 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 volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises 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.

He is rewarded with a six figure bonus.

At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These "securities" are then bundled and traded on international securities markets.

Naive investors don't really understand that the securities being sold to them as "AA Secured Bonds" are really 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.

The traders all receive a six figure bonus.

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 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

,

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.

They all receive a six figure bonus.

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

Now do you understand?

[TommoPhysicist]

I do understand .......

but wonder why the government didn't pay off the unemployed alcoholics debts directly, instead of bailing out the banks.

(as then all the drunks wouldn't be homeless and living in tents, and the banks wouldn't be owning worthless empty houses)

Edited September 10, 2012 by TommoPhysicist

[h5kaf]

I do understand .......

but wonder why the government didn't pay off the unemployed alcoholics debts directly, instead of bailing out the banks.

(as then all the drunks wouldn't be homeless and living in tents, and the banks wouldn't be owning worthless empty houses)

The problem would still have existed. The drunks probably were all homeless and living in tents anyway, but the problem really is that these worthless debts (which as you suggest could have been paid off earlier) have created lots of paper securities (which are basically worthless) but which are viewed as a sound investment. So long as they are demanded and sold and rise in price and value as assets the whole charade continues.

Paying off the original debt at this stage doesn't stop the collapse and unemployment of those firms whose balance sheets are made up of the worthless paper.

By the way banks love to see complicated paper bonds rated AA. They hate drunks with no money. They are also staffed by greedy people who want to earn bonuses by selling the paper bonds. All the poor drunks want is to drink themselves to death!!

[davejones]

It's a pity that most of the population of Europe still don't understand this.

[maxman71]

But via the ECB/ US Fed Reserve Tooth Fairy and Santa Claus, the EU and US will soon have loads of new cash lavished upon them. Helga will soon get a new line of credit and will re-open her bar, and the homeless, deadbeat drunks will so be enabled to drink again on credit. Business will boom once again...

[maxman71]

I do understand .......

but wonder why the government didn't pay off the unemployed alcoholics debts directly, instead of bailing out the banks.

(as then all the drunks wouldn't be homeless and living in tents, and the banks wouldn't be owning worthless empty houses)

TommoPhysicist -- YOU are more than welcome to disburse your cash to these deadbeats and I'll hang onto mine for more worthy expenditures. The root issue here is dingbat Helga saw fit to lavish upon her customers who she knew could not pay. All you are suggesting is we should assume the responsibility for those who consistently abscond from their responsibilities. Your approach also reeks of, "it's not MY fault or responsibility; it's someone else's fault that I am a drunk; someone else owes me, and I am entitled to continue being a deadbeat drunk..."

If this sort of nonsense continues, those who are prudent, responsible and use commone sense will eventually REBEL for continually being held responsible for the behavior of deadbeats. This is the stuff civil wars and revolutions are made of. Good luck with your demented "solution".

[impulse]

TommoPhysicist -- YOU are more than welcome to disburse your cash to these deadbeats and I'll hang onto mine for more worthy expenditures. The root issue here is dingbat Helga saw fit to lavish upon her customers who she knew could not pay.

I think you've also missed a point. Helga the dingbat could only put her own money at risk without the help of the bankers. There was no risk to taxpayers and society as a whole, and Helga would have suffered her own consequences when things went south.

It was only when the bankers got involved that your money and mine were put at risk...

That's the root issue, not the fact that a small business lady made poor decisions. It's the fact that the bankers made big paper profits and big bonuses for making risky bets with no downside risks to themselves when things went into the toilet- since they were backstopped by government money.

Edited September 10, 2012 by impulse

[falang07]

This went exactly the same way not just in Europe, but in USA, and many other countries, too.

[PCA]

I do understand .......

but wonder why the government didn't pay off the unemployed alcoholics debts directly, instead of bailing out the banks.

(as then all the drunks wouldn't be homeless and living in tents, and the banks wouldn't be owning worthless empty houses)

The problem would still have existed. The drunks probably were all homeless and living in tents anyway, but the problem really is that these worthless debts (which as you suggest could have been paid off earlier) have created lots of paper securities (which are basically worthless) but which are viewed as a sound investment. So long as they are demanded and sold and rise in price and value as assets the whole charade continues.

Paying off the original debt at this stage doesn't stop the collapse and unemployment of those firms whose balance sheets are made up of the worthless paper.

By the way banks love to see complicated paper bonds rated AA. They hate drunks with no money. They are also staffed by greedy people who want to earn bonuses by selling the paper bonds. All the poor drunks want is to drink themselves to death!!

just wondered why you opened this thread double you are not one of Helga's customers, are you?

[12DrinkMore]

This has been chugging around the internet for a while.

http://www.businesstimes.co.tz/index.php?option=com_content&view=article&id=1651:heidis-bar-world-economics-made-simple&catid=37:column&Itemid=60

http://www.w3f.com/patriots/derivatives.html

http://www.bobistheoilguy.com/forums/ubbthreads.php?ubb=showflat&Number=2344357

Dunno why the name has to be changed between Heidi, Susan and Helga.

Cultural differences, I suppose......

[sysardman]

It's a pity that most of the population of Europe still don't understand this.

It's a pity most TV members don't understand this too, so many jumping on the 'Thailand is so corrupt' bandwagon when they can't see that every greedy little money grubbing sh*t is sticking their snouts in their homelands troughs.

[asiawatcher]

Everyone still misses the point they are getting pieces of paper as payment which is simply worth zero. It is an IOU only and has no backing other than the Govt's say it is good for it. Does anyone trust the Govt's anymore? It's just a huge game of monopoly.

[Naam]

Everyone still misses the point they are getting pieces of paper as payment which is simply worth zero. It is an IOU only and has no backing other than the Govt's say it is good for it. Does anyone trust the Govt's anymore? It's just a huge game of monopoly.

since decades i am asked to pay with "simply worth zero" pieces of paper for anything i buy. my wife too confirmed that whatever things she buys she pays with pieces of paper that are "simply worth zero."

[12DrinkMore]

Everyone still misses the point they are getting pieces of paper as payment which is simply worth zero. It is an IOU only and has no backing other than the Govt's say it is good for it. Does anyone trust the Govt's anymore? It's just a huge game of monopoly.

A currency is given legitimacy (?) by the government insisting taxes are paid in that currency. This more or less forces the population to use it and also bestows some value onto those worthless bits of paper.

In fact only some 3% of a currency is issued by the government (central bank). All the rest is brought into existence by the commercial banks issuing piles of debt.

Does anybody trust the banks anymore?

[Naam]

In fact only some 3% of a currency is issued by the government (central bank). All the rest is brought into existence by the commercial banks issuing piles of debt.

and once again dear children we are listening to fairy tales horror stories about fractional-reserve banking

[midas]

In fact only some 3% of a currency is issued by the government (central bank). All the rest is brought into existence by the commercial banks issuing piles of debt.

and once again dear children we are listening to fairy tales horror stories about fractional-reserve banking

If you are implying fractional-reserve banking is a fairytale or a horror story does that mean you deny its existence?

[simple1]

Where do the the Basel Accords come into play in the scenario above?

[yoshiwara]

In fact only some 3% of a currency is issued by the government (central bank). All the rest is brought into existence by the commercial banks issuing piles of debt.

and once again dear children we are listening to fairy tales horror stories about fractional-reserve banking

If you are implying fractional-reserve banking is a fairytale or a horror story does that mean you deny its existence?

Maybe if you studied an Economics 101 course and focussed on banking and the multiplier effect you wouldn't scare yourself with half-digested info.

[midas]

In fact only some 3% of a currency is issued by the government (central bank). All the rest is brought into existence by the commercial banks issuing piles of debt.

and once again dear children we are listening to fairy tales horror stories about fractional-reserve banking

If you are implying fractional-reserve banking is a fairytale or a horror story does that mean you deny its existence?

Maybe if you studied an Economics 101 course and focussed on banking and the multiplier effect you wouldn't scare yourself with half-digested info.

Academic and mainstream economics today does nothing but spew propaganda to support an ever expanding and ever greedy financial sector.

people would be better off learning physics 101 for when this eventually happens

[Naam]

Where do the the Basel Accords come into play in the scenario above?

it seems that Basel III accord will be, like the proverbial can, kicked further down the road. Signore Draghi of the ECB repeated his relevant concern.

[Naam]

Academic and mainstream economics today does nothing but spew propaganda to support an ever expanding and ever greedy financial sector.

people would be better off learning physics 101 for when this eventually happens

you mean some sort of equation with the variables "consistency of shit, fan rpm, max air pressure, etc."

[midas]

Academic and mainstream economics today does nothing but spew propaganda to support an ever expanding and ever greedy financial sector.

people would be better off learning physics 101 for when this eventually happens

you mean some sort of equation with the variables "consistency of shit, fan rpm, max air pressure, etc."

yes making sure the plug is out so it doesn't end up filling the bath

[yoshiwara]

Academic and mainstream economics today does nothing but spew propaganda to support an ever expanding and ever greedy financial sector.

people would be better off learning physics 101 for when this eventually happens

Is that what they say to encourage the know-nothings reading zero-hedge like websites?