An analogy for the real estate crash

Thursday, March 12th, 2009 | Economics |

Heidi the bar owner decides to extend her customers easy credit terms so they can drink now and pay later:

Taking advantage of her customers’ freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi’s borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

You’d think a story about excess alcohol consumption, immediate gratification, and unlimited credit would end well, but no.

(And needless to say spend now pay later has been the U.S. government’s policy for decades, and the rate at which we’re outspending our income is accelerating dramatically right now.)

Tags: banks, mortgages