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An idiot’s guide to the world financial crash – The story of Helga’s bar

(This was sent to me by a reader of this blog – I’ve tweaked this a bit, but can’t claim this as my own work. Apologies if you’ve already read this on other websites)

Helga is the proprietor of a bar. 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 hires an expensive management consultant who comes up with a new marketing plan that allows customers to drink now, but pay later.

Helga keeps track of the drinks consumed on a ledger (thereby granting loans to the customers).

Word gets around about Helga’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Helga’s bar. Soon she has the largest sales volume for any bar in town.

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

Consequently, Helga’s gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral. This growth allows Helga to increase her staff from 2 to 11.

The bank vice-president is rewarded with a six-figure bonus.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions by transforming these customer loans into DRINKBONDS. Docile ratings agencies give these DRINKBONDS the highest rating level. These “securities”  are then bundled and aggressively sold on international securities markets. Greedy but ignorant investors (other banks, pension funds etc) don’t really understand that the securities being flogged to them as “AAA Secured Bonds” are really debts of unemployed alcoholics. All the buyers are interested in are the high rates of interest that will be paid on the DRINKBONDS. So, these securities soon become the hottest-selling items for some of the nation’s leading brokerage houses and the DRINKBONDS are packaged and repackaged and re-repackaged so there are ever more DRINKBONDS for the traders to sell.

The traders all receive six-figure bonuses.

The bosses at the ratings agencies also all receive six-figure bonuses.

The people buying the high-interest-paying DRINKBONDS all get six-figure bonuses

One day, even though the number of DRINKBONDS being sold keeps on increasing, a risk manager at the original local bank decides that the time has come to demand payment of some of the interest on the debts incurred by the drinkers at Helga’s bar so that the buyers of the DRINKBONDS can start earning the promised high interest rates on their bonds. He informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back even a small part of their drinking debts. Since Helga cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Helga’s 11 employees lose their jobs.

Overnight, DRINKBOND prices drop 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 Helga’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the Triple A-rated DRINKBOND 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 goes bankrupt, closing the doors on a family business that had thrived 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 by being bailed out by a multibillion-dollar no-strings attached cash infusion from the government desperate to prop up the banking system and save it from collapse.

All these executhieves receive seven-figure bonuses.

Unfortunately, the government is already deeply in debt after years of spending much more than it takes in tax revenue. So the government has to massively increase its borrowings to raise the money to save the banking system. This increased debt pushes up the annual interest payments the government must make to service its ever-rising debts. The funds required to meet the government’s higher interest payments are obtained by punitive new taxes levied on employed, middle-class, non-drinkers and workers struggling to get by on the minimum wage – none of whom have ever been in Helga’s bar – and by cutting spending on things like healthcare, education, policing and defence. As the new taxes and spending cuts are just enough to cover the higher interest payments, it will be left to future generations to pay off the government’s increased borrowing. The rich naturally have smart accountants and so avoid these new taxes. The politicians who saved the banks all go on to take up extremely lucrative jobs at the banks they have saved with borrowed money that can probably never be paid back.

The politicians all become multi-millionaires.

Now do you understand?

(You’re welcome to forward this link to anyone you think might be interested. Btw, I’d be grateful if a few people would support this website by buying copies of my latest book GREED UNLIMITED)

(click on title to leave a comment)

2 comments to An idiot’s guide to the world financial crash – The story of Helga’s bar

  • zabbage

    “As the new taxes and spending cuts are just enough to cover the higher interest payments, it will be left to future generations to pay off the government’s increased borrowing. ”

    what spending cuts… no, you forget to mention the QE to keep interests low and fund the government to help blow the bubble even bigger for future generations and condeming everyone to pay the price for the coming hyper-inflation..

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