Mystery solved

Discussion in 'Economics' started by bearice, Dec 7, 2010.

Do you agree with this example?

  1. Yes

    2 vote(s)
  2. No

    6 vote(s)
  1. How the Bailout package really works (maybe)

    It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

    On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

    The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drink bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.

    At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town. No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

    And that, ladies and Gentlemen, is how the bailout package works.
  2. oraclewizard77

    oraclewizard77 Moderator

    Or maybe there is a run on an Irish bank since those that have TV's see the news that Ireland is next on the hit list for speculators shorting the bonds due to debt concerns.

    So now the banks don't have enough euros to pay the customers who want there money back. Now the banks don't have enough money to support the troubled loans that were borrowed on better times.

    So the government gives the banks money to keep them from failing, but the government now has run out of money since it spent it all, and can not print more money since its in euro's now.

    So the Germans which are doing better lend money to Ireland. So the news comes on that Ireland is now safe, and they go after Spain.

    So now they are going after the Spanish banks, I sell naked puts on BBVA when it falls below $ 10/sh.

    So why did I do this? Because although its a bank in Spain, it actually makes 50% of its money from the rest of the world, and is actually profitable, just like the puts are right now.
  3. The butcher produced meat for the hotelier. The pig farmer produced a pig for the butcher. The guy at the farmers co-op produced feed & fuel for the pig farmer. The publican produced drinks for the guy at the co-op, the hooker produced sex for the bartender and the hotelier produced a room for the hooker.

    So no...I dont agree with it. There was plenty that was produced and nobody in this town was in debt to begin with. Everyone was owed as much as they were in debt, so they had a net zero balance to begin with.
  4. Bearice, in your little tale did you notice that quite apart from the 100 note all the debts were counter balanced and could have been settled by offset the whole time...without the illusion of the 100 note. Not much like how an econmy really works, more like how counter party risk is actually hedged...and yet it would be reported by histerical morons as 1000 of derivative risk even though it was all along zero. Ireland would be like that only if all the bank investors had countervailing defaulted mortgages in the same banks and in the amount of thier investment....not the real Ireland there is real debt that is not offset by any credit...the real estae is not worth the mortgages, the investors money in the banks has been lost, and the people can't afford to pay it tell a silly tale, roll over the debt, and go to the pub. You should try the broken window falllacy for your next thought experiment.
  5. Theres not a shortage of producers, theres a shortage of money....

    (must be the bankers)

    This situation really peaks my <b>interest</b>
  6. The debt credits are the money...the issue is what they are worth. In the hotel story they are worth 100% to cancel a counterbalancing obligation. Of course in a real economy they might be worth much less than 100% to a third party. That is the primary problem with NAMA acquistion remedy in regard to the Irish banks.