Thursday, March 26, 2009

THE BAIL OUT\STIMULUS PLAN

Heidi is the proprietor of a bar in Berlin . In order to increase sales, she decided to allow her loyal customers, most of whom are unemployed alcoholics, to drink now but pay later. She kept track of the drinks consumed on a ledger (thereby granting the customers credit or loans).

Word got around. Increasing numbers of unemployed alcoholics flooded into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment constraints and increased consumption, Heidi increased her prices for wine and beer, the most
popular drinks. Her sales increased exponentially.

A young and dynamic customer service consultant at the local bank
recognized these customer debts as valuable future assets and increased
Heidi's borrowing limit. He sawn o reason for undue concern since he had the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transformed these
customer debts (and bank assets) into DRINKBONDS, ALKBONDS and PUKEBONDS.

Those new securities were then traded on markets worldwide. No one really
understood what those names meant and how the securities were secured or guaranteed. Nevertheless, the prices continuously climbed. The securities become top-selling items because top financial advisors (who often were getting commissions on the sales) recommended them as good investments.

One day, although the prices were still climbing, the risk manager of Heidi's bank decided that the time has come to demand payment of Heidi's line of credit. So, Heidi tried to collect the debts incurred by the drinkers at her bar.

Of course, the drinkers could not pay the debts.

Heidi could not fulfil her loan obligations to the bank.

Heidi filed for bankruptcy.

The bank defaulted on its obligations with the bonds.

DRINKBONDS and ALKBONDS dropped in price by 95%.

PUKEBOND performed somewhat better,stabilizing in price after dropping by 80%.

The suppliers of Heidi's bar, having granted her generous credit terms due to her large purchases and healthy accounts receivable statement, also filed for bankruptcy when Heidi could not pay them.

The Government realizes the failure of banks and retailers could lead to a recession, decided to intervene.

The Government bought DRINKBONDS and ALKBONDS to prop up the price. It sought foreign investors to help with the purchase.

The Government also loaned money to the bank so that it would have money to loan and meet its bond obligations.

The Government did not have enough money to do all this, so it had to borrow money. It sold Treasury Bonds to foreign countries.

The Government realized it had to generate funds to pay its obligations.

So, after consultation with leading Government economic thinkers, the Government decided to generate the funds by a tax levied on non-drinkers.
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