Lessons from Papa

This one from Daddy-o. When not busting his 'hind at work he often times tries his hand at educating his children. This is done in the form of forwarded emails. [Sigh] The intimacies and personal bonds that are formed during parent-child lessons. Agree with the below point of view or not, I personally like this one:



Economics 101

An Easily Understandable Explanation of Derivative Markets

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. She keeps track of the drinks consumed in 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 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 not only having to write
off her bad debt but also with losing over 90% of the presumed value of
the bonds. Her wine supplier claims bankruptcy, closing the doors on a
family business that
had endured for three generations, and 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.

Now, I understand!