Financial Crisis explained in simple language - Aussie Stock Forums

Results 1 to 3 of 3
  1. #1

    Default Financial Crisis explained in simple language

    Financial Crisis explained in simple language

    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.

    Finally an explanation I understand...

  2. #2

    Default Re: Financial Crisis explained in simple language

    well it's obvious the stimulus will work. It allows us to keep drinking with cash (not allowed to pay any of our debts) until we reestablish linda's confidence to allow us to get more credit and we can start over again. Who said the stimulus wouldn't work? And eventually maybe the non drinkers will get sick of bailing us out. But not till after they get there $900

  3. #3

    Default Re: Financial Crisis explained in simple language

    Nothing new under the sun just history repeating itself
    In light of the present financial crisis, it's interesting to read what Jefferson said in 1802:

    Banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered

Similar Threads

  1. Fear and Greed: What should the Financial Planning industry do?
    By Sir Osisofliver in forum General Investment and Economics
    Replies: 41
    Last Post: 23rd-January-2009, 10:06 AM
  2. The upside to the financial crisis
    By Pager in forum General Investment and Economics
    Replies: 2
    Last Post: 10th-January-2009, 11:48 AM
  3. Sub Prime Crisis explained!
    By johenmo in forum General Investment and Economics
    Replies: 1
    Last Post: 13th-October-2008, 05:48 PM
  4. Where does one get "good" financial advice?
    By Tom Ronalds in forum Beginner's Lounge
    Replies: 39
    Last Post: 1st-June-2008, 09:30 PM
  5. Financial calendar
    By Joe Blow in forum Trading/Investing Resources
    Replies: 2
    Last Post: 28th-March-2005, 02:00 PM


Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
Aussie Stock Forums