Current Economic Crisis – Simply Explained
March 19, 2009 1 Comment
I got a very nice explanation of the current crisis by email , thought that I
should share.I don’t know who the original writer is but it is very well explained 🙂
Phajja is the proprietor of a Siri-Paya and Nehari Shop in Lahore. Sales are
low and, in order to increase them, he comes up with a plan to allow his
customers to eat now and pay later. He keeps track of the meals consumed on
Word gets around and as a result increasing numbers of customers flock to P
hajja’s shop. Phajja’s suppliers are delighted and are very willing to sell
more and more raw materials for the meals he prepares. Phajja shows them his
ledger of receivables and they extend him credit.
A young and dynamic customer service consultant at the local bank recognizes
these customer debts as valuable future assets and gives Phajja a credit
line and then increases Phajja’s borrowing limit.
Taking advantage of his customers’ freedom from immediate payment
constraints, Phajja jacks up the prices of his Nehari and Siri-Paye.
Customers don’t mind as they are not required to pay on the spot. Sales
volume increases massively; Banks and suppliers lend more; Phajja opens more
outlets. He sees no reason for undue concern since he has the debts of the
customers as collateral.
At the bank’s corporate headquarters, expert bankers recognize Phajja’s
customer loans as assets and transform these customer assets into BONDS.
These negotiable instruments are given exotic names such as SIRIBOND,
PAYABOND, MAGHAZBOND AND BONGBOND. These securities are then listed on the
Stock Exchange and traded on markets worldwide. No one really understands
what the names mean and how the securities are guaranteed but, nevertheless,
as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a credit risk manager of
the bank decides that the time has come to demand payment of one of the
debts incurred by Phajja. Phajja in turn asks his clients to pay up.
One by one they refuse; the clients cannot pay back the debts. Phajja
refuses to serve them any more. The clients stop coming.
Phajja is really screwed now. He cannot fulfill his loan obligations and
therefore claims bankruptcy. All Bonds drop in price by between 80 to 95%.
The suppliers of Phajja, having granted generous payment due dates and
having invested in the securities are faced with similar problems. The meat
supplier defaults on payment to the sheep and cattle supplier and claims
bankruptcy. The atta supplier is taken over by a competitor; Pajja lays off
the cook and staff. Bankruptcies soar, unemployment mushrooms.
The bank that lent the money in the first place is set to collapse. It is
saved by the Government following dramatic round-the-clock consultations by
leaders from the governing political parties with Phajja commuting back and
forth in his Executive jet and Mercedes 500SEL, brokering the deal.
The funds required to save the economic collapse are obtained by a tax
levied on the citizens, most of whom do not eat Nehari or Siri-paye.
Now substitute Phajja with USA or GM/FORD or any US Bank…….