Steve’s guide to what went wrong in the EU.
Mel 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.
Mel keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).
Word gets around about Mels "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Mels bar. Soon she has the largest sales volume for any bar in town.
By providing her customer’s freedom from immediate payment demands Mel gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer - the most consumed beverages.
Consequently, Mel 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 Mel 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 6-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 continuously climb and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
The traders all receive a 6-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 Mels bar. He so informs Mel. Mel then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Mel a can not fulfil her loan obligations she is forced into bankruptcy. The bar closes and Mels 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 Mels 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 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 Mels bar. Now do you understand
Mel 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.
Mel keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).
Word gets around about Mels "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Mels bar. Soon she has the largest sales volume for any bar in town.
By providing her customer’s freedom from immediate payment demands Mel gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer - the most consumed beverages.
Consequently, Mel 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 Mel 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 6-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 continuously climb and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
The traders all receive a 6-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 Mels bar. He so informs Mel. Mel then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Mel a can not fulfil her loan obligations she is forced into bankruptcy. The bar closes and Mels 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 Mels 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 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 Mels bar. Now do you understand
Who's Mel? How is this about the EU?
