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).My only caveat: All satires tend to over-simplify a complex situation. This one blames borrowers as if they were deadbeat drunks. In fact, there were also cowboy lenders who sold sub-prime mortgages that, over time, doubled monthly payments to borrowers.
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 (and can purchase credit default insurance from a triple A-rated company like AiG).
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 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 fulfill 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 non-drinkers.
After the housing bubble burst, mortgaged properties entered a deflationary phase. As borrowers lost equity in their homes, mortgage debt far exceeded the collateral value of the properties. As borrowers lost jobs, they could no longer keep up the payments on their homes. All in all, a very sad situation.
So how deep does this crisis go? The total market for credit default swaps (a form of insurance on these derivatives) is $55 trillion. Not exactly chump change!
So how deep does this crisis go? The total market for credit default swaps (a form of insurance on these derivatives) is $55 trillion. Not exactly chump change!
UPDATE: Our contributor, Brian Krenz, has posted a more accurate and detailed account of the credit crisis in the form of a short animatic video. Have a look here.
About that mystery project I am working on, the tentatively tentacled title is: Broken Pensions - American Dreams Stolen.
Both of these analogies were excellent and not really oversimplified.
ReplyDeleteAs for the bar and the drunks, what I got from that was not that borrowers were drunken deadbeats but rather that they contributed to the crisis by NOT connecting the dots and looking at the whole picture but simply indulging in the instant gratification of being able to buy.
This is not true of all borrowers, but tends to make up a higher portion of the subprime group.
And then there were those greedy bastards making a killing off of this with no thought for the eventual consequences to the economy, the country or the future of our children.
So...what if I don't drink? :)
ReplyDeleteThat was a GREAT video. Leaving a h/t to Swash Zone in my blog...
ReplyDeleteThe only thing is, the video tells the story of how the financial collapse unfolded in the industry. It doesn't show how wages didn't keep up with inflation and drove Americans to use their homes as a source of wealth.
Good point, Matt and just bears out how many moving parts there are and the complexity of the whole credit crisis.
ReplyDeleteTAO: So...what if I don't drink? :)
ReplyDeletePerhaps it is time to acquire a taste for George Dickel #7.
Matt: Good point, one I had forgotten about. Perhaps one assumption was that real estate values would keep rising, and loans were assumed to be safe as long as property values held.
But the other point is this: Economic growth was not equally distributed among all population groups; the corporate elite got 103% of the economic growth pie ... meaning everyone else lost out (whilst housing, energy, education, and health care costs rose much higher than the base inflationary rate).
Result: A negative savings rate and a vasty weakened middle class. After the housing bubble burst, negative equity in property values also meant no wiggle room to borrow against bad times.
I touched on the subject of unequal wealth distribution in this earlier post: Ghost of Depression Past.
Since I will have to absorb the cost I might as well enjoy the benefits...Dickel it is! :)
ReplyDeleteOne of the benefits of supply side economics, at least as we know it, is that wages were kept low, even during the period of full employment, by the ability to tap ones house for equity and credit cards. Thus the working and middle class were able to enjoy a lifestyle without affording it.
I remember in the late 90's when everyone was commenting on how great it was that we had achieved full employment without inciting inflation...that told me right then and there something was seriously wrong.
I remember right after NAFTA and a group of business people were speculating on the savings they would enjoy by moving to Mexico...and I asked them who they were planning on selling their now quite profitable products to if Americans did not have jobs?
Oops, forgot that side of the equation!
So, now they have gone from Mexico (lazy and corrupt) to Guatamala to now Honduras...and now the complaint is rising energy costs are driving them out of business in Honduras.
Where next? I always wondered how they afforded these multi million dollars moves all the time. I guess it is easier to keep moving around then it is to sit down and analyze your situation to find a better way.
TAO, I blame Milton Friedman and the Chicago School of Economics for many of the dislocations that have rippled across the decades. Economics has two faces: one face represents capital and wealth; human welfare is the other. Keynes and Galbraith understood the balance between these two. Either Friedman did not understand, or did not care.
ReplyDeleteSupply side is an economic theory without a soul. It turned workers into mere commodities and cast a blind eye on unbridled greed. The savings and loan crisis of the late 1980s should have been a warning. Signs and symptoms leading to the current crisis were ignored.
The deregulation of the airline industry, often touted as a success story, was anything but a success. Sure, open markets and unrestricted competition lowered the cost of air travel for travelers. On the flip side, airlines operated on razor thin margins, safety was compromised, and hundreds of thousands of airline workers fell on hard times. Soon after deregulation, the raiders moved with greedy appetites to strip corporate assets. Thereafter, bankruptcies started … first in the 1980s. These continue to this day.
“Sully” Sullenberger, the pilot who saved 150 passengers by making an emergency landing in the Hudson River, testified before the House Aviation Subcommittee last week:
“Bankrupcies were used by some as a fishing expedition to get what they could not get in normal times … [placing] pilots and their families in an untenable financial situation.” Without ”experienced crews in the cockpit … there will be negative consequence to the flying public,” he added.
This is what supply side economics brings to every industry it touches.
After reading Conservative Convictions blog tonight I have decided to start my own political party....
ReplyDeleteCall it Unitarians...whatever...I know one thing, I can't be a conservative any longer...
Octopus, your knowledge of supply side economics is refreshing!
Thanks!
At Jenn's blog, Average American suggested a new party called "Average American." I like that although I doubt it would be to the blogger AA's liking.
ReplyDeleteBut even if I've been commenting a little tongue in cheek, I really do think we need vast political reform to limit campaign spending and allow a few new parites to develop.
TAO and Rockync,
ReplyDeleteI've been following Jennifer's departure from Conservative Convictions with sadness. Although I don't agree with her views on economics, she is, like Robert, a good person whom I would not disrespect on account of politics.
I made a big mistake some months ago, one that I regret. I was reading Gayle's "Dunkirk" post and concluded that it was motivated by homophobia. Inasmuch as my liberal instinct rejects all forms of discrimination, my impulse was to remove Conservative Convictions (CC) from our blog roll in protest. Having grown up in the era that struggled for civil rights, all forms of discrimination are anathema to me. Within me rose the voice of an outraged adolescent from long ago remembering the violence and ugliness of that era.
My mistake was to assume all contributors at CC were of the same mind, and I should have kept communications open. It would have made an equally strong statement to voice my concerns without the over-reaction. I have been regretting this ever since.
I noticed the rancor and recrimination even inside the conservative blogosphere. In my view, this is no longer about politics. It is about fear. Fear that seeks a scapegoat and an outlet for internalized anger. Fear of questioning long cherished, closely-held beliefs. Fear of change and a new world order. Jennifer was honest and far ahead of her peers in facing those fears. She deserved respect for inquisitiveness and independence, not the “RINO” response and recriminations that she received.
In a peculiar sort of way, I hope the conservative movement finds its voice. Just like there are checks and balances within our system of government, we need competition in our politic life. We need conservatives to keep liberals honest, and vice versa. What concerns me, however, is the fear exploited by demagogues, and I see signs of this too ... consequences that are far worse than fear.
These are fearful times.
ReplyDeleteBut Barrack Obama should not be the focus of ones fears.
There is no one in the United States who is not fearful of the economy and the effect our current economic condition will have on their personal lives.
Thus we hear calls to return to the principles of the founding fathers, or a return to a simpler life where current events did not enter our personal lives.
This is something that all of us should worry about becauase it leads to the formation of hate groups and anti society movements. I suspect that it is one of the reasons that Obama wants to make Limbaugh the face of the opposition because it most clearly defines the opposition as anti government.
One of the major reasons I support Obama is because I realized that all destructive movements that have formed have always formed during periods of economic upheavels. We are in a period of economic upheavel.
When one claims to be for lower taxes and smaller government, in light of our history over the last twenty years, then obviously one cannot support either party.
Limbaugh has basically destroyed the Republican Party by stopping all forms of debate and or dissent within the party.
He has, in effect, formed his own party and his operatives are running amuck on the internet.
But it is not a political movement as much as it is a movement of hate. It is against everything and offers nothing as an alternative except some hypotheical of returning to some ideal that never existed.
That is the classical definition of Fascism; and fascism becomes popular during periods of economic upheavel.
Oh, and my favorite bit of trivial....
ReplyDeleteIn 1980 their was one vote for Donald Rumsfield for VP at the RNC....and that was from Milton Friedman.
I am in constant awe of the amount of intelligence, knowledge and ability I find hanging out with you folks. Coming into the blogosphere has been quite the education. I have always been socially active and had a rudimentary understanding of economics and politics, but around here I find my self on a dizzying learning curve.
ReplyDeleteSo, 8pus, Tao, Fogg, Dino, all the others,thank you.
You are amazing people and it is an honor and a privelege to know you all.
BTW - 8pus, while I too was sorry that Jenn ended up as collateral damage, I think you did the right thing takeing CC off the roll. And Jenn has embarked on her own new venture rather than being bullied into marching in step - she deserves our support and respect - even though I don't agree with her that much either!
Gee, thanks Rocky...and all I ever wanted to be known for is my charm and good looks!
ReplyDeleteOh, and sense of humor, dread the day I lose that.
I just lost the little leg for my keyboard....crazy world?
If Steele had any smarts and wanted to make a name for himself he could have stood up to Rush and accept the reality that Rush and his followers are not conservatives but realistically reactionary libertarians. They fit more with Ron Paul (I doubt that Ron would appreciate the association). If the republican party had any leadership there would be a split right now from two parties to three. In a recent poll only 22% of Americans call themselves conservatives and relate to Rush Limbaugh. With Democrats holding 49% (so much for the center-right mumbo jumbo) with "independents" falling in a distant second from democrats.
The Chritian Coalition fell apart after Falwell died and now Dodson is retiring.
The great 'coalition' that was the Republican Party is history.
Not real sure where the neoconservatives landed after the 2008 election but I am sure they are holed up somewhere planning their next putsch....
This report from Huffington Post might piss off a few people:
ReplyDeleteTwo days before Ford announced a major debt restructuring that diluted shareholders, TARP-recipient Morgan Stanley was asking its private wealth clients who owned shares in the Detroit car company whether they could use those shares to execute short sales.
In a short sale, the short-seller "borrows" securities, then sells it, on the belief the stock price will fall. The short-seller then repurchases the securities at the new, lower price, and returns it to the lender. In this way, the short-seller profits from selling the borrowed securities for more than he later repurchases them for.
According to an email obtained by the Huffington Post, a Morgan Stanley financial advisor sent a letter to a private wealth management client who owns several thousand shares of Ford stock, asking permission to use the stock for short-sales. In the email, Morgan Stanley Stock Services indicates it would pay the client 13% on the dollar value of the stock borrowed, annualized.
This is unusual for several reasons:
Normally, financial firms can borrow securities to execute short sales without telling their clients, but this client had requested that his securities not be used for this purpose, prompting the email.
In addition, with interest rates so low, the 13% is, according to the client, a pricey fee. Traditionally, financial firms do not pay their clients any fee when they use their shares to execute short sales.
"With T-bills at a half of a percent, they were willing to pay over 20 times what I am getting for my cash," the client said. "This was a major enticement to build a shorting position. They were clear in that intent in the email."
Yep, Just another fine example of the disconnect most Americans have between the concept of wealth creation and that of, economic growth, investing, and job creation...
ReplyDeleteDestroy a company and gain a tax break...
Capitalism ain't what it used to be...if it ever was.
Rockync: So, 8pus, Tao, Fogg, Dino, all the others, thank you.
ReplyDeleteYou are deserving of thanks too, Rocky. As TAO said: “You are the nicest person on the Internet.” As Octopus says: “We need a calm, level-headed, and reassuring voice like yours to keep us sane.”
Calm. Level headed. Reassuring. Hmmm. Is it still okay for me to visit and post here Octo? I am none of those fine qualities.
ReplyDelete"his operatives are running amuck on the internet."
ReplyDeleteSomething like Amok only muckier? They sure as hell are. It's the biggest invasion of creepy crawly invertebrates I've seen since tropical storm Faye flooded the woods behind my house.
"Capitalism ain't what it used to be...if it ever was."
Hey, when you're out of Tao, you're out of truth.
T101, of course you are welcome here. Any time. Just a note caution: Be careful ... ahem ... because cephalopods have virgin ears.
ReplyDeleteI promise to be on my best behavior Octo. I heard Cephalopods had some mean delete tntacles and weren't afraid to use them.
ReplyDelete"I noticed the rancor and recrimination even inside the conservative blogosphere. In my view, this is no longer about politics. It is about fear. Fear that seeks a scapegoat and an outlet for internalized anger. Fear of questioning long cherished, closely-held beliefs. Fear of change and a new world order. Jennifer was honest and far ahead of her peers in facing those fears. She deserved respect for inquisitiveness and independence, not the “RINO” response and recriminations that she received."
ReplyDeleteI swear Octo' you keep this up and I might get a big head! Nah! You honestly brought tears to my eyes! To hear a compliment among many criticism's lately, it was much needed.
Seriously, though, I have much respect for you. It was tough to leave CC but I think I realized that it was becoming too "conservative" for me. I never thought I would say that! I don't know what I am because I certainly don't fit in with other conservatives anymore. (A New Conservative maybe?) Their fear makes them bitter and closed minded. I want no part of that. I want what is best for America, whatever it may happen to be. I am definitely not a pro when it comes to economics but I am trying to listen and understand rather than just repeating the "less spending, tax cut" mantra that they have been saying over and over. I've added you to the blogroll over there and hope you will stop in when you can. We may disagree, but sometimes I think you learn more from those differing opinions than the ones that are a repeat of your own!
"And Jenn has embarked on her own new venture rather than being bullied into marching in step - she deserves our support and respect - even though I don't agree with her that much either!"
ReplyDeleteActually Rocky, I am finding that we have a lot more in common that I previous thought! I think we are on the same page on quite a few things!!
Actually, Jenn, I want to take that back! I think we do have more in common than I first thought.
ReplyDeleteThe big problem is everyone wants to debate their differences.
Now that we are pushing to discuss common issues, we seem more like just Americans discussing our country and our lives.
I think if we were all sitting around the table talking to the Obamas we'd realize that they want exactly what we all want; a better life for ourselves and our kids and a better country.
Who knows where to download XRumer 5.0 Palladium?
ReplyDeleteHelp, please. All recommend this program to effectively advertise on the Internet, this is the best program!