FW: Economics 101

Curator's note: Yes, the type was actually this big when this FWD: hit the MRWD inbox.
Easily Understood Explanation of Derivative Markets - in plain English.
Heidi is the proprietor of a bar in Detroit. 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.
Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers' loans). Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.
By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi'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 Heidi'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 on international 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 Heidi's bar. He so informs Heidi.
Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.  Since Heidi 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 community.
The suppliers of Heidi'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 dollar 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 Heidi's bar.


Anonymous said...

So then... the free market is bad, yes? Capitalism is bad because it gives incentives to do stupid things in order make quick profits? And what does this say about the supposedly smart, hardworking, wealth creating business types (largely Republican), that they would behave in such an irresponsible manner?

Problem here: the unemployed drunks in Detroit (read: worthless black people) weren't really the customers in the real world. The real customers were mostly middle and upper middle class people who were chasing the American "dream" of bigger and bigger houses and spending on more stuff and being told not to worry, you can pay later. Its a nice attempt to shift blame onto the weakest and poorest members of society. I get it, no one wants to acknowledge that people like them were actually to blame. It was all the fault of those dirty freeloaders.

Also, Jesus Christ is that super sized font annoying!

Anonymous said...

People using their homes as ATM machines had nothing to do with it.

When house on my block were 750,000 I knew something was wrong if you were paying that to be my neighbor.

Here is another the banks did not have to Raise the rates on the ARMs

gruaud said...

As always, trying to justify the
ideology of selfishness.

Bebe 99 said...

The headline read "Easily Understood Explanation of Derivative Markets - in plain English." But it really glosses over deriviatives.
And as ANON 1 pointed out using poor, unemployed, minorities, woman business owner, and the stupidest of all making loans to buy a consumable. Sometimes simplifying something just makes it dumber.

Bebe 99 said...

The headline read "Easily Understood Explanation of Derivative Markets - in plain English." But it really glosses over deriviatives.
And as ANON 1 pointed out using poor, unemployed, minorities, woman business owner, and the stupidest of all making loans to buy a consumable. Sometimes simplifying something just makes it dumber.

katz said...

It's always the little stuff that bugs me. Why is she named Heidi?

ferschitz said...

Agree with Katz that the use of the name Heidi is annoying, esp as it implies some Aryan purist who dupes the drunken lazy minorities.

Whatever. Despite the grating us of giant fonts, this does in some very limited capacity explain what happened. However, WHAT is the point??

Are you "blaming" the purist Aryan Heidi Bar Owner? Are you "blaming" the local bank? Are you "blaming" the big investment banks who created stupid junk bonds? Are you blaming the rating agency who knowingly and willingly gave the junk bonds AAA ratings, all the while realizing how worthless they are?

OR - are you somehow blaming the drunken louts who took advantage of loans freely given to them by the purist Aryan Heidi (who also knew what she was doing)???

That's the big flaw in this dumbed down explanation of, essentially, what happened. Yet, as per usual, with rightwing forwards, the onus is on the usual suspects: the poors, the minorities and the illegals. It's "those cadillac welfare queens" who are ripping off the innocent and blameless middle class, who works "so hard."

Wake up and smell the coffee, Losers! If you don't like what happened, then start demanding better regulations of Wall Street and the banks; start demanding the corporations and the obscenely wealthy pay their fair share of taxes.

Endlessly victimizing yourselves to poor people is a stupid exercise in futility. They are not the problem.

Anoner said...

Heidi???? I think whoever wrote this stupidity needs to go yodel where the sun don't shine.

Hooray4US said...

As some rightwing thinktank churned out this little racist screed to dupe the foolish, our elected "Lords" in the Senate - on both sides of the aisle - are scrambling to create legistation that really doesn't regulate Wall St, and, in fact, seeks to keep the incredibly wealthy venture capitalists and hedge funders from paying taxes at a fair rate.

Would ya say that junk like this is foisted out there to dupe the stupid and keep their eyes away from what's really going on?

Wake up sheeples, indeed.

Anonymous said...

You know, I have to admit this is one of the more creative exercises in victim-blaming. But then I have yet to see anything written by a movement conservative that indicates that they understand the concept of informed consent, or the fact that a lot of mortgage holders didn't get the opportunity for it because they were lied to by their loan officers.

Anything to avoid blaming the market system for creating a mathematical black hole for money, amirite?

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