The Financial Crisis for Dummies!
01 March 2009, 10:12 PM
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The Financial Crisis for Dummies!
This is actually quite a good explanation!!
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 on the non-drinkers.
Finally an explanation I understand ...
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 on the non-drinkers.
Finally an explanation I understand ...
01 March 2009, 11:02 PM
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funny I was just reading about the US financial situation and a stagering number was mentioned the Trillion,
let alone the billion!!!
All these figures are being banded about by the governments in the US and here but few peoplereallyunderstand the magnetude of these numbers. Its like thepower of doubling its only when you look at it from different point of view when you get a grip of how much that really is...
e.g the US national anual budget deficit is $1.75 trillion dollers and the total nation debt of the US 11tn... and the UK's latest package to really put us all in debt of £178 billion... are just names and numbers, but if you look at it in something you can realate to then.
A million seconds is 11 days.
A billion seconds is around 32 years.
And a trillion therefore is 32,000 years.
thats its we're all fooooked
let alone the billion!!! All these figures are being banded about by the governments in the US and here but few peoplereallyunderstand the magnetude of these numbers. Its like thepower of doubling its only when you look at it from different point of view when you get a grip of how much that really is...
e.g the US national anual budget deficit is $1.75 trillion dollers and the total nation debt of the US 11tn... and the UK's latest package to really put us all in debt of £178 billion... are just names and numbers, but if you look at it in something you can realate to then.
A million seconds is 11 days.
A billion seconds is around 32 years.
And a trillion therefore is 32,000 years.
thats its we're all fooooked
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02 March 2009, 08:58 AM
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Theres a very good powerpoint presentation we received way back in March 08 that explains very simply the US mortgage crisis. I can't host it as its a PP file otherwise I'd post a link.
Two stick men talking about how to make the 5hitty debt look good by hiding it behind good assets.
And that was March 08!
Two stick men talking about how to make the 5hitty debt look good by hiding it behind good assets.
And that was March 08!
02 March 2009, 01:45 PM
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The Times Magazine put it in perspective a few weeks ago.
IIRC a stack of 1000 x £10 notes is 11cm high.
UK commitment to bank bailout = £1300bn
= a stack of £10 notes 1430km long = the distance from London to Warsaw.
IIRC a stack of 1000 x £10 notes is 11cm high.
UK commitment to bank bailout = £1300bn
= a stack of £10 notes 1430km long = the distance from London to Warsaw.
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