Topic: Our drunken economics explained (Read 1868 times)

Lot's of money are created after financial crisis, based on FED's balance sheet, that's about 2 trillion Dollars


Now the question is: Where should all these money go, to get the best effect?

Suppose that there are 30 million people out of work, then if FED just loan the 2 trillion dollars to these people, that's $66667 per person in a 3 years' period, about $22222 per year, quite enough to support their daily spending and mortgage, and bring stability to the economy

And the reality is that the money goes to banks to purchase mortgage backed securities, or to purchase government bonds. Jobless rate stay high, and government pay social benefit for those jobless people. Of course in such a distribution the average $ spent per jobless person is much lower, banks benefit most, but the economy as a whole are in a much worse shape and the society will experience some turbulence

How could those jobless people payback their loan? But the same is valid for banks: How could they payback the bailout money? They payback these loan by loaning more in the future, and jobless people can do the same if FED provide help, and if economy keeps going good, after they find job they will start to payback the loan

As the Freddie and Fannie saga is playing out, we see one other factor is the top management pushing for even more loaning to the more disreputable drunks with programs to encourage loaning, and then covering up their exposure to bad debt when repackaging collateralized debt securities. The only part that is not coherent is that the loans were secured debt, whereas beers can't be reposessed by the bank (unless you repossess piss and vomit, which is kind of like foreclosing on upside down properties after the housing bubble crash)

For the German speaking people out there, here's a funny version of this story: http://www.youtube.com/watch?v=h_hnY3KHpa0

this story/joke never gets old
firs seen when the us sub-prime mortgages started to fail in 2008

It's an interesting thought. Like how so much online now seems to be add funded by everything else in a sort of pointless loop that never-the-less tricks us into thinking everything is being held up by something. The effort we spend moving money around in elabrote ways dosn't do anything usefull, like grow crops, or design software. In fact the best software is designed by people who mostly ignore how money is moving around.

I love this thread, the story is superb and spot on :¬)

Except this bit

While technically true I'm not sure about the attitude. As a middle class person myself I recorgnise that I no more deserve to well off than somone working hard for most of nearly every day as a cleaner deserves to be poor. It's also not something that it's impossible to fix, but perhaps somewhat complicated.

What a pitty!

If central bank will be little bit generous and lend those unemployed alcoholics some cash, we won't run into all these mess... 

Where can I buy some of these Drinkbonds and Alkibonds?  I have a feeling I can make a killing buying in at these low low prices.

MARY is the proprietor of a bar in Dublin. She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar – she will go broke.

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 on a ledger (thereby granting the customers loans).

Word gets around about Mary's 'drink now, pay later' marketing strategy and, as a result, increasing numbers of customers flood into Mary's bar.

Soon she has the largest sales volume for any bar in Dublin — all is starting to look rosy.

By providing her customers freedom from immediate payment demands Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.

Consequently, Mary's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary'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 and Alkibonds. These securities are then bundled and traded on international security markets.

The new investors don't really understand that the securities being sold to them as 'AAA' secured bonds are really the debts of unemployed alcoholics. They have had a 'rating house' certify they are of good quality.

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 Mary's bar. He so informs Mary.

Mary then demands payment from her alcoholic patrons, but, being unemployed alcoholics, they cannot pay back their drinking debts.

Since Mary cannot fulfil her loan obligations she is forced into bankruptcy. So she now is broke.

The bar closes and the 11 employees lose their jobs.

Overnight, Drinkbonds and Alkibonds drop in price by 90%.

The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Mary'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 euro, no-stringsattached 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 Mary's bar.

Now, do you understand economics in 2011?

http://www.corkman.ie/lifestyle/our-drunken-economics-explained-2958437.html