This analogy explains the current banking crisis. It is based upon an anonymous story floating around the internet. I rewrote it to make it more realistic, but want to give kudos to the unknown person who first came up with the concept.

Tom owned a bar in Washington, DC. He mostly served legislators and the employed because most of the local unemployed were alcoholics and could not afford to buy drinks from Tom. Barney and Chris, two of the legislators who frequently patronized Tom’s bar thought this was not right, perhaps even racist, and passed legislation to "strongly encourage" Tom and other bartenders to extend credit to all alcoholics.

Bartenders were then forced to track all drinks imbibed by consumers. If the consumers did not have money to pay, the bar owners had to give the customers loans. Word got around about the new "drink now, pay later" policy and, as a result, increasing numbers of customers flooded into bars around the nation. Soon bars were doing better than ever before and more and more people were buying bars to help service the increased demand for drinks. Since the bartenders were a bit skeptical about the customers’ ability to cover these loans, they raised the price of their drinks. This caused them to lose some of their best customers, but they had so many new customers, especially from the previously underserved segment of unemployed alcoholics, that they were making more sales than ever. Most of the alcoholics did not mind the increased prices, many were not planning on paying their tab anyway.

Many national and international banks then saw an opportunity. They realized they could loan money to the bartenders at a discount and then sell these loans to investors. They were willing to do this for several reasons. First, the bartender’s business would be collateral. Second, the bar tabs themselves were additional collateral. Third, the bankers knew their friends in Congress created this situation. The big bankers had donated so much money to legislators, they expected Congress would cover them if needed. Thus, the bankers then loaned money to the bartenders and used the bar and bar tabs as collateral. The bartenders desperately agreed to the bankers’ terms because otherwise they would have gone out of business trying to comply with the government pressure forcing them to give credit to bad risks.

The banks loaned the bartenders as much money as they could justify and transformed these debts into DRINKBONDS, ALKIBONDS, and PUKEBONDS. These securities were then bundled and traded on international security markets. Naive investors didn't really understand that the securities being sold to them as AAA secured bonds were really the debts of unemployed alcoholics.

Nevertheless, the bond prices steadily climbed, and the securities soon became the hottest-selling items for some of the world’s leading brokerage houses. One day, even though the bond prices were still climbing, a risk manager decides that the time had come to demand payment on the debts incurred by the drinkers. His bank started informing bartenders that they needed to pay up.

Tom and his colleagues (other bartenders) were afraid this day would come. They then demanded payment from their alcoholic customers, but being unemployed alcoholics they cannot pay back their drinking debts. Since, the bartenders could not fulfill their loan obligations, they were forced into bankruptcy. The bars closed and the employees at these bars lost their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS dropped in price by 90%. The collapsed bond asset value destroyed the banking industry's liquidity and hindered it from issuing new loans, thus freezing credit and virtually eliminating economic activity around the world.

The suppliers of the various closed bars were now in trouble too. They had granted generous payment extensions to various bars and had invested their firms' pension funds in the various BOND securities. They found they were now faced with having to write off these bad debts and had lost over 90% of the presumed value of the bonds.

These problems were almost insurmountable. Tom’s wine supplier also claimed bankruptcy, closing the doors on a family business that had endured for three generations. Tom’s beer supplier was taken over by a competitor, who immediately closed the local plant and laid off 150 workers. These situations were mirrored across the world as many bars were forced to closed after being unable to pay their debts. The only bars that were still healthy were those that managed to minimize the loans they made to alcoholics despite the will of Congress.

The bank, the brokerage houses and their respective executives were saved and bailed out by a multi-billion dollar cash infusion from Congress. The same legislators who created the requirement to provide loans to alcoholics were now on TV attacking the bankers and the bartenders. The funds required for this bailout were obtained by new taxes levied on employed, middle-class, non-drinkers.

For more information on the credit crisis, click here. Keep in mind, this credit crisis was caused by the same people who want to control our health system...

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