17 March 2009

Idiot's guide to recession

And so here is a e-mail that I got on a very simple and easy manner to explain recession. It uses terms that we laymen are more familiar with ;-)



Linda is the proprietor of a bar in Cork. 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 Linda's bar. Taking advantage of her customers' freedom from immediate payment constraints, Linda 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 Linda'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 to his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Linda's bar. However they cannot pay back the debts. Linda can not 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 Linda'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 (and vested interests). The funds required for this purpose are obtained by a tax levied on the non-drinkers!!!

Now, isn't this pretty cool ??

Shyam

Posted by Shyam Krishnaswamy at 10:46 AM

2 Comments

  1. Blogger Vikas Jayaram posted at Tuesday, March 17, 2009 at 11:13:00 AM GMT+5:30  
    So, the moral of the story is drink anyway !?
  2. Blogger Karthik posted at Wednesday, March 18, 2009 at 7:18:00 AM GMT+5:30  
    The only difference (and an important difference) is that consumed wine cannot be resold, but a home that has been purchased can be resold. In Linda's case, she gave a loan against nothing, whereas in a mortgage bank's case, they gave a loan against the house. So, even if the borrower cannot pay back, the bank can foreclose the home and get the loaned money back. The problem was a lot of foreclosures happened causing the home prices to fall.

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