The Global Financial Crisis in Layman’s Terms…

I did not write the following.  I received it in an email without a name of the author.  It came in Hebrew.  I translated it to English for the benefit of my English speaking friends and readers…

Jennifer owned a bar in Miami.  In order to boost sales, she decided to let her customers, mostly unemployed alcoholics, to drink first and pay later.  She kept track of the drinking by recording the debts in her books.  This recording approved, in retrospect, the customers’ loans.  The rumor spread, and as a result, customers were streaming into Jennifer’s bar.  Jennifer used the advantage she had over the competition, and increased the price of wine and beer, the most popular items on her menu.  The sales shot up right away.

An ambitious and dynamic local investment consultant, with the neighborhood bank – Smirnoff Bank, recognized Jennifer’s customers debts as a valuable future asset, and increased Jennifer’s credit line at the bank.  He didn’t see a reason to take any guarantees, as he recognized the drinkers’ debt as a perfectly good collateral.  The Smirnoff Bank, Jennifer’s bank, could give Jennifer a huge credit line for the simple reason that the Federal Reserve, the Central Bank of the USA, a bank that prints money for the government of the US, loans money to governments all around the world, gave the Smirnoff Bank an almost unlimited line of credit.

The Smirnoff Bank recognized the potential, and experts translated Jennifer’s Bar success and Jennifer’s customers’ debt into bonds.  A bond, for those who aren’t familiar with the term, is an obligation to pay the amount noted on the bond when the bond’s time is up.  The “Alco”, “Holic” and “Barf” bonds were traded in global financial markets.  Their price went up steadily, and therefore, the demand for them became outstanding.  Analysts rated them AAA, the highest possible, which usually means that the bond is almost risk free, and will be honored.

One day, a senior executive at the Federal Reserve Bank decided that it was time to have the Smirnoff Bank pay up its debt in its entirety, immediately, and in cash.  The Smirnoff Bank couldn’t come up with the cash.  Neither could Jennifer.  Needless to say, Jennifer’s customers couldn’t raise a penny.  The inevitable happened, Jennifer declared bankruptcy.  The bonds “Alco” and “Holic” lost 95% of their value in one day.  The “Barf” bonds settle on 80% lower.  Jennifer’s suppliers, who kindly gave her a very comfortable credit line, and invested generously in the bonds were facing a new situation.  Her wine supplier declared bankruptcy, her beer supplier experienced a hostile takeover.

The Fed took responsibility of all those who defaulted on their debt, the bar, the various alcohol suppliers, the assets of the Smirnoff Bank of Miami and more…  The Smirnoff Bank went out of business.

The government officials carried a dramatic discussion around the clock with their assistants (former employees of the Fed), and a decision was made to grant the Smirnoff Bank of Miami a large sum of money in order to “stabilize the state of the market and the economy”.  The grant was financed by a new tax of the residents of Miami, who refrain from drinking altogether…

Finally, a comprehensive explanation to the global economy crisis.  Something even I could understand.