The following story illustrates the reasons for the present financial crisis. I am not aware of its origins so no credits, but here it is, as explained to me.
Irish Governments New Simplified Tax Return For 2011
“Paddy is the proprietor of a Public House in Tipperary. He realizes that virtually all of his customers are unemployed alcoholics and they can no longer afford to patronize his bar. To help alleviate his problem, he comes up with a new marketing plan that allows his customers to “Drink Now, and Pay Later“. He keeps a full track of all the alcohol consumed in a ledger, thus granting his customers loans.
Word quickly gets around about Paddy’s “Drink Now, Pay Later” marketing strategy and customers increase in very large numbers and very soon he has the largest drink sales volume for any bar in Ireland.
By providing his customers freedom from immediate payment demands, Paddy gets no resistance, when he substantially increases his prices for wine and beer and Paddy’s gross sales volume soon increases massively.
A young and bonus motivated vice-president at Paddy’s local bank recognizes that these customer debts constitute valuable future assets and increases Paddy’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 PUKEBONDS, DRINKBONDS, and ALKIBONDS. These securities are then bundled and traded in the International Securities market.
Naive investors don’t really understand that the securities being sold to them, as AAA secured bonds, are really the debts of unemployed alcoholics. 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 Paddy’s bar.
Paddy now demands payment from his alcoholic patronage, but since being unemployed alcoholics they now cannot make payment on their past drinking debts. Since Paddy cannot now fulfill his loan obligations he is forced to declare himself bankrupt. The Pub closes and his seven employees lose their jobs.
Overnight, PUKEBONDS, DRINKBONDS, and ALKIBONDS drop in value 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 immediate community.
Paddy’s suppliers, due to his massive business, had granted him generous payment extensions and in turn had invested their firms pension funds in these various BOND securities. They now find they are faced with having to write off his bad debt while losing over 90% of the presumed value of the bonds. His wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations. His beer supplier is taken over by a leading competitor, who immediately closes the local plant and lays off the 125 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 levied on employed, middle-class, non-drinkers who have never been in Paddy’s bar in their lives.
This tale should help you understand Irish economics as they exist in 2010.
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