Mary’s Bar- An excellent analogy for the 2008 financial collapse

I found this on a uber- annoying click-bait site, and wanted to share this story because it’s the best 3 minute explanation of the 2008 financial collapse I’ve read.

If someone knows of the original author, I’m happy to link this directly.

The Big Short is the best overall-  but takes much more than 3 minutes to read.

Mary’s Bar.

Mary is the proprietor of a bar in Dublin. She realises that virtually all of her customers are unemployed drunks and alcoholics and consequently they can no longer afford to patronise her establishment. To solve this problem she comes up with a new marketingMary's Patron plan that allows her customers to drink now but pay later. She keeps track of the drinks consumed in a ledger thereby granting loans to her customers.

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

By providing her customers with drinks without asking for immediate payment, Mary gets no resistance at all when at regular intervals she substantially increases her prices for wine and beer and also for her gastronomic table which is of wide renown.

Mary’s sales volumes increase massively. A young and dynamic manager 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 drunks and alcoholics as collateral and through Mary’s success he believes that he”ll be promoted to vice president of the bank.

At the bank’s corporate headquarters expert traders work out a way to make huge commissions and transform these customer loans into Drinkbonds, Alcibonds and Sickbonds. 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 drunks and alcoholics.

Nevertheless the bond prices continuously climb and these 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 and diners which by now are becoming enormous. He therefore informs Mary that they must pay up or be banned from the establishment.

Mary then demands payment from her drunk and alcoholic patrons but being unemployed alcoholics she quickly finds that they cannot meet their drinking debts. As the suddenly very unhappy and disconsolate Mary cannot fulfil her loan obligations, she is sadly forced into bankruptcy and the bar closes with eleven employees losing their jobs.

Overnight Drinkbonds, Alcibonds and Sickbonds drop in price by 99%. These collapsed bond asset values destroy the bank’s liquidity and prevent it from issuing new loans, thus freezing all credit and economic activity not only in Dublin but throughout Ireland.

The suppliers of Mary’s bar had granted her generous payment terms and had invested their firms’ pension funds in the various Drinkbond securities. They find that they are now faced with having to write off her bad debts and with losing over 99% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had existed for three generations and her beer supplier is taken over by a competitor who immediately closes the local brewery and lays off 150 workers.

Fortunately however the bank, the brokerage houses and their respective executives are saved and bailed out by a multi billion euro no strings attached cash injection from their friends and cronies in government. The funds required for this bailout are obtained by high new taxes levied on employed middle class non drinkers who have never been to Mary’s Bar and who have never even heard of it.

Luckily for the non drinkers, the drunks and alcoholics are not at all pleased about the ending of free drinks at Mary’s Bar and they don’t like the new taxes and reduced welfare payments either. Consequently everyone is united in their desire to vote for a new government in early 2011 which promises to renege on all junior and senior debt obligations and to reopen Mary’s Bar on the same terms and conditions as before.

And that my friends is the state of Irish and pan European economics in late 2010.

Posted in Economics, Fables, Guest Blogs and tagged , , , , .

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