Wednesday, March 04, 2009

Drinking Explanation of Credit Crisis

Heidi is the proprietor of a bar in Norfolk. 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

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

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
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
and 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

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