Financial Crisis explained to the layman

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‘Recession’, ‘Economic Depression’, Financial Crisis. These terms have been going around the market atmosphere to and fro, between educationists, economists, scientists, industrialists and the our general workforce. But guess what, i myself included and a lot of other people just didn’t understand what or where it went wrong in the first place. And so  a friend of mine, an MBA graduate from Mumbai, gave me this insight, which is arrogantly simple and understandable, with sticks and buds of humor here and there. 🙂 So here it is, the crisis to the layman.

Heidi is the proprietor of a bar in Berlin . 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 loans). 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 increases massively. 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 DRINKBONDS, ALKBONDS and PUKEBONDS.

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 (subsequently of course fired due his negativity) of the bank 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. Heidi cannot fulfil 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 against the non-drinkers.

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Posted by Arif   @   1 April 2009 2 comments

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2 Comments

Comments
Apr 2, 2009
5:25 am
#1 anjath :

very good post.. this alcohol shop can be substituted for anything i guess. rest is actually almost real.

Apr 2, 2009
12:10 pm
#2 Arif :

@Anjath
thanks a lot buddy… actually the credit should go to that friend of mine. 😀

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