Helen is the owner of a pub in Manchester. She realises that virtually all of her customers are unemployed alcoholics and as such, can no longer afford to patronise her bar. This means that the pub is in danger of going bust. To solve this problem, she comes up with a new marketing idea that allows her customers to drink now, but pay later.
Helen keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans). Word gets around about Helen’s ‘drink now, pay later’ marketing strategy and so as a result, increasing numbers of customers, all unemployed alcoholics, flood into Helen’s pub. Soon she has the largest sales volume for any pub in Manchester and her business’s ‘paper value’ is huge.
By providing her customers freedom from immediate payment demands, Helen gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Helen’s gross sales volume increases massively.
A young and dynamic manager at the local bank recognises that these customer debts constitute valuable future assets and increases Helen’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 in the City, expert traders figure out a way to make huge commissions and transform these customer loans into DRINKBONDS. These securities then are bundled and traded on international securities markets.
Naïve investors don’t really understand that the securities being sold to them as secured bonds really are 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 and are sold and bought world-wide.
One day, even though the bond prices still are climbing, a risk assessment executive at the bank head office decides that the time has come to demand payment on the debts incurred by the drinkers at Helen’s pub, so he informs Helen of this.
Helen then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Helen cannot fulfil her loan obligations she is forced into bankruptcy by the bank. The pub closes and Helen’s 15 employees lose their jobs.
Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Helen’s pub had granted her generous payment extensions and had invested their firms’ pension funds in the 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 and 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 multibillion pound 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 even heard of let alone visited Helen’s pub.
Now do you understand?