Dummies’ guide to what went wrong in Europe

An oldie but a goodie [for those who haven't read it]:

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 comes up with a new marketing plan that allows her customers to drink now, but pay later.

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

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.

He is rewarded with a six figure bonus.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These “securities” are then bundled and traded on international securities markets.

Naive investors don’t really understand that the securities being sold to them as “AA Secured Bonds” are really debts of unemployed alcoholics. Nevertheless, the bond prices continue to climb and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

The traders all receive a six figure bonus.

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 Helga’s bar. He so informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back 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 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 multibillion dollar no-strings attached cash infusion from the government.

They all receive a six figure bonus.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who’ve never been in Helga’s bar.

Now do you understand?

12 Responses to “Dummies’ guide to what went wrong in Europe”

  1. wiggiatlarge July 24, 2012 at 12:11 Permalink

    Good find Haiku, but the image of Helga suggests a caption competition at the very least !

  2. IanPJ July 24, 2012 at 13:30 Permalink

    Very good analogy. It also clearly shows the difference between capitalism and the failed Keynesian Creditism that is bringing collapse to all around.

    Capitalism as its name suggests is based on capital, i.e. what you have, what you have earned and saved, not on what you can borrow.

    That capitalism is being blamed for this crisis is manifestly unjust. It is Creditism that has failed.

  3. James Higham July 24, 2012 at 14:08 Permalink

    Wiggia – she is rather fulsome.

    IPJ – spot on.

  4. Welshcakes Limoncello July 24, 2012 at 14:33 Permalink

    Good analogy but the EU is a club and we all agreed to help each other.

  5. Lord Nazh July 24, 2012 at 14:37 Permalink

    Shorter Welsh:

    The EU clubs Presidents agreed to help each other, no matter what the club participants want :)

  6. James Higham July 24, 2012 at 14:37 Permalink

    Did we, Welshcakes? When was this that we all agreed to help each other in the EU State? ;-)

  7. IanPJ July 24, 2012 at 14:40 Permalink

    Following EU Economic policy is MAD – Mutually Assured Destruction.

  8. wiggiatlarge July 24, 2012 at 15:57 Permalink

    Welshcakes you should know better than anyone the state that Sicily is in, for years its semi autonomous position has been used in a way no other region would have got away with, the governor has allegedly mafia connections, whats new, and has civil service around him bigger than Romes, jobs for votes.Many years ago Bossi and his Northern League wanted to cut loose the mezzogiorno as 80% of the country’s welfare was going there, whole towns claiming blind benefit etc, Bossi of course as with politicians everywhere relented on most of this when he was given a position in government, so the status quo remains.
    The govenor is asking for a no strings attached loan of 400 million euros to add to the islands debt of 5.3 billion this nonsense whether it be Sicily Valencia and now Murcia is a large hole that there isn’t enough money to fill.
    http://www.reuters.com/article/2012/07/17/italy-sicily-idUSL6E8IHJQQ20120717?feedType=RSS&feedName=everything&virtualBrandChannel=11563

  9. CherryPie July 24, 2012 at 22:35 Permalink

    Lord Nazh sums up what is happening…

    People (club participants) WAKE UP!!!

  10. Wolfie July 25, 2012 at 10:31 Permalink

    But the government [who bailed everybody out] is Helga’s husband who naturally had a 50% ownership in the bar anyway and used profits to buy a nice Mercedes CLS.

  11. James Higham July 25, 2012 at 10:52 Permalink

    Ian, Wiggia, Cherie, Wolfie – yes. And the indicated action for us is?

  12. IanPP July 25, 2012 at 12:19 Permalink

    And the indicated action for us is?

    James, that is too tall an order for a comment box, it is a whole and truly democratic political agenda, instilling a social and economic work ethic based upon ability, the depoliticising of education (and everything else), a change in moral direction and reigning in any PTB attempting to put them back in the box of service (to again become public servants not masters) and ensuring that we are indeed all equal under the law.

    But the very first step is leaving the EU. Regaining our sovereignty over all things, giving back as a nation our decision making powers, and then distributing those powers to the lowest level.

    Personally I favour the Swiss model, where the people directly decide the important and controversial issues, where no treaty may be entered into without the explicit say of the voter, where government and officials are prevented from taking power and is contained to holding office.

    There is no quick solution to the problems we find ourselves in, no single source of indicated action for us.

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