I read this...

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Little John

I read this...

Post by Little John »

...and it made me laugh

Mary is the proprietor of a bar in Dublin . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar.

To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Mary's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Mary's bar. Soon she has the largest sales volume for any bar in Dublin.

By providing her customers' freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Mary's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral

At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the 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.

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 Mary's bar. He so informs Mary.

Mary then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.Since, Mary cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Mary's bar had granted her generous payment extensions and had invested their firms' pension funds in the various 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 multi-billion euro no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes/reduced public services levied on employed non-drinkers who have never been in Mary's bar.

Welcome to 21st century economics
johnhemming2
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Re: I read this...

Post by johnhemming2 »

Little John wrote: Welcome to 21st century economics
It is, however, practical rubbish as she would run out of booze pretty quickly.
Little John

Re: I read this...

Post by Little John »

johnhemming2 wrote:
Little John wrote: Welcome to 21st century economics
It is, however, practical rubbish as she would run out of booze pretty quickly.
No it isn't and no she wouldn't because she could keep buying it so long as the funny money lent to her from the bank (on the back of her dodgy loan book) kept flowing her way. The problems only ensue when the dodgy, non-repayable loans are actually called in (see "sub-prime-crisis" for details).
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Post by johnhemming2 »

The point about the toxic mortgages is that they were mandated by Clinton.
Little John

Post by Little John »

johnhemming2 wrote:The point about the toxic mortgages is that they were mandated by Clinton.
What, precisely, does that statement provide by way of refutation of any of the fundamental facts of the process that led us to this point across the entirety of the Western capitalist world?

Nothing, is the answer, other than a predictably pathetic attempt at obfuscation and misdirection, which is your strong suit. But, then, being an (ex) politician with professional links to the finance/banking sector, what else should we expect?
vtsnowedin
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Post by vtsnowedin »

:roll: Some might be forgetting the "The Community Reinvestment Act " which forced Mary to extend credit to drunks that never had and never would pay their bills.
Get rid of that and make any bank that writes a loan service it and and stand the risk until it is payed off and you will have a whole new paradigm.
And yes that will place a lot of poor people out of the market or greatly reduce the amount of house they can afford but that saves them from investing all they have into what will become a foreclosure and stealing several years of their life's work.
johnhemming2
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Post by johnhemming2 »

Little John wrote:what else should we expect?
I suppose you might expect someone who understands how things work.

It does appear, however, that you are not interested in facts.
Little John

Post by Little John »

vtsnowedin wrote::roll: Some might be forgetting the "The Community Reinvestment Act " which forced Mary to extend credit to drunks that never had and never would pay their bills.
Get rid of that and make any bank that writes a loan service it and and stand the risk until it is payed off and you will have a whole new paradigm.
And yes that will place a lot of poor people out of the market or greatly reduce the amount of house they can afford but that saves them from investing all they have into what will become a foreclosure and stealing several years of their life's work.
Yep.

But, in truth, you don't need any legislation forcing Mary to make bad loans. you only need to flood the market place with easy credit. Anyone choosing to take the moral high ground or, even, the long-term-self-interested high ground, would be immediately punished by being out-competed by those around them who choose to take the easy money. Thus, everyone gets dragged to the party kicking and screaming whether they want to or not. This is true even for the alcoholics. If we presume that the primary motive in life for an alcoholic is to get drunk and that any index of success is going to measured by them in such terms, then any alcoholics who takes the moral high ground by not taking out the unsustainable loan with Mary, will be "out-competed" by his fellow alcoholics, who will all be merrily getting drunk around him.

This is what easy credit that has no underlying asset backing it up does. It perverts markets.
johnhemming2
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Post by johnhemming2 »

Actually no. The requirement to lend money to people unlikely to pay the debts was a big part of the toxic debt issue.

It is true that the repackaging of this make the whole thing very remote which very few people spotted at the time. Then insuring that against loss made it even more remote.

The reason peak conventional oil kicked it off is that it demonstrated that the loans were non performing (ie not being paid off).
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Post by kenneal - lagger »

johnhemming2 wrote:The point about the toxic mortgages is that they were mandated by Clinton.
And which of his wealthy backers told him to enact that legislation? The idea didn't suddenly pop into his head. And it was passed by the US law makers who are nearly all in the pocket of big business.

The Prostitute State applies to the US to an even greater extent than it does here. by the way that book was written by a former vice chair of the Liberal Democrat Party.
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vtsnowedin
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Post by vtsnowedin »

kenneal - lagger wrote:
johnhemming2 wrote:The point about the toxic mortgages is that they were mandated by Clinton.
And which of his wealthy backers told him to enact that legislation? The idea didn't suddenly pop into his head. And it was passed by the US law makers who are nearly all in the pocket of big business.

The Prostitute State applies to the US to an even greater extent than it does here. by the way that book was written by a former vice chair of the Liberal Democrat Party.
That would be Al Sharpton, Jessie Jackson and the rest of the Rainbow coalition. Just a ploy to sew up the minority vote for the Democrats.
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Post by biffvernon »

I read this:
Nassim Nicholas Taleb wrote:
When people get rich, they lose control of their preferences, substituting constructed preferences to their own, triggering their own misery. And these are the preferences of those who want to sell them something (a skin-in-the-game problem as their choices are dictated by others who have something to gain, and no side effects, from the sale).

I've mentioned here the following anecdote. I once had dinner in a Michelin-starred restaurant with a fellow who insisted on eating there instead of my selection of a casual Greek place. People in the restaurant were of the very constipated style, that kind of athmosphere. Dinner consisted in a succession of complicated small things. It felt like work. I left the place starving. Now if I had a choice I would have had some time-tested recipe (say a pizza with fresh ingredients, or a juicy hamburger) in a lively place --for a tenth of the price. But because the fellow could afford the expensive restaurant, we ended up the victims of some complicated experiments by a chef judged by some Michelin bureaucrat (one that would fail the Lindy effect, instead of eating some minute local variation around a progress through Sicilian grandmothers).

(Footnote: Hamburgers are tastier than filet mignon, because of the higher fat content, but people have been convinced that the latter is better because it is more expensive to produce).

The same with real estate. Most people, I am convinced, are happier in close quarters, in a real barrio-style neighborhood, where they can feel human warmth, but when they have big bucks they end up pressured to move into a humongous impersonal and silent mansions, far away from the neighbors. Not counting the fact that their house will be professionally managed like a corporation.

I am saying this because, with the passage time, I am more and more convinced that very few people understand their own choices, and end up being manipulated by those who want to sell them something. Looking at Saudi Arabia which should progressively revert to the pre-oil level of poverty, I wonder if taking away some things from them will make them better off.
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RenewableCandy
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Post by RenewableCandy »

Where did he write that? It's gorgeous!
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biffvernon
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Post by biffvernon »

He posted it on Facebook!

https://www.facebook.com/nntaleb/posts/ ... 0809308375

And yes, it does offer some hope that the human spirit can survive, perhaps even better prosper, the transition to the resource-scare future.
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Post by RenewableCandy »

Thanks Biff!
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