Thursday, 10 November 2011

Joe’s Bar brings global financial ruin


JOHN MANGUN
OUTSIDE THE BOX  
Business Mirror
http://www.businessmirror.com.ph/home/opinion/19108-joes-bar-brings-global-financial-ruin

THE world banking system is in chaos and headed for more catastrophes. The following story is taken from the web site of gold guru Jim Sinclair. It’s long but at the end you will better understand why the US housing market and banking system collapsed. You will understand how big countries like Italy (a G-8 member) and little countries like Greece are coming apart.

The story reads:

Joe is the proprietor of a bar. He realizes that virtually all of his customers are unemployed alcoholics and, as such, can no longer afford to patronize his bar. To solve this problem, he comes up with a new marketing plan that allows his customers to drink now, but pay later. Joe keeps track of the drinks consumed on a ledger thereby granting loans to his customers.

Word gets around about Joe’s “drink now, pay later” marketing strategy and, as a result, more and more customers flood into the bar. Soon he has the largest sales volume for any bar in town.

By providing his customers freedom from immediate payment, Joe gets no resistance when, at regular intervals, he substantially increases his prices for wine and beer.

Consequently, Joe’s gross sales volume goes up and up.

A vice president at the local bank recognizes that these customer debts constitute valuable future assets and increases Joe’s borrowing limit.

The banker does not see any reason for 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 Joe’s customer loans into DRINKBONDS.

These “securities” then are bundled and traded on international securities markets.

Naive investors do not really understand that the securities being sold to them as “AA Secured Bonds” are really debts of unemployed alcoholics. Nevertheless, the bond prices climb continuously and these securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day 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 Joe’s bar. He tells Joe to pay up. Joe then demands payment from his alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.

Since Joe cannot fulfill his loan obligations, he is forced into bankruptcy. The bar closes and Joe’s 11 employees lose their jobs.

Overnight, DRINKBOND prices drop by 90 percent. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in Joe’s town.

The suppliers of Joe’s bar had granted generous payment extensions and had invested their firms’ pension funds in the DRINKBOND securities. They find they are now faced with having to write off Joe’s bad debt and losing over 90 percent of the value of the bonds.

His wine supplier also goes broke. His beer supplier is forced to sell out.

Fortunately though, the bank, the brokerage houses, and their executives are saved and bailed out by a multibillion-dollar no-strings attached cash infusion from the government.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Joe’s bar.

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Housing loans in the US and some in Europe were given to people who could not afford the loans. The scheme was based on the belief that housing prices would always continue to rise as an unending flow of new buyers entered the market. The US ran out of “unemployed alcoholics.” That is what eventually happens to all pyramid schemes.

However, the “Joe’s Bar” scenario was also being executed on a national level. “Joe’s Bar” were the international banks and the unemployed alcoholics were Greece and Italy, among others.

Both Italy and Greece did not qualify for the loans that they were granted by the banks during the last decade. But the banking “Joe’s Bar” could not just let that kind of revenue from lending the money just disappear. So the banks gave these countries a version of “drink now; pay later.” We are seeing the results today.

The government talks about the Philippines being “shielded” from the effects of global uncertainty. Actually we should welcome the uncertainty and do everything to take advantage of it.

With billions of dollars flowing out of the West into Asia, the Philippines is still acting like it is afraid to take the money. Shifting rules, more regulations and red tape, endless political posturing. What a waste.



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E-mail to mangun@gmail.com and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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