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Nigd3
9th Oct 2008, 11:22
Apologies if this has been done before but can someone explain to me in very simple terms how the current economic disaster occured?

- Why do certain banks/institutions need billions of ús or dollars to keep going - where did all their money go?

- why are certain businesses now worth millions less? - did they stop production or lose all their sales?

- How can a country be suddenly bankrupt? - was this not obvious 6 months ago, when they were presumably just a bit skint then?

- Why do the people responsible for this huge problem not have to pay back their millions in bonuses they have earned in the last decade, making huge mistakes with the economies of multiple countries?

I cannot get my head around economics on this scale. Anyone else the same or just me?

Track Coastal
9th Oct 2008, 11:24
Its starts in 1971. Google: Nixon Shock

tony draper
9th Oct 2008, 11:29
Summat I don't understand,how come there is great cheer in the land when interest rates are reduced as yesterday when Banks Building Societies Credit Card Companies seem to be able to charge any interest rate they please up to and including interest rates that would have seen them hanged for usury in Victorian times.
:confused:

Buster Hyman
9th Oct 2008, 11:41
Ok, think of it this way.

You & another guy are playing Monopoly. The other guy is the bank and, he's playing as the Bank. You have $100 in front of you & the bank, who, as I mentioned, is playing the Bank, has all the rest. Your playing piece is the car & you are at the start. You have the Dice, but all the squares say "Go to Jail, go directly to Jail, do not pass Go".

You're ****ed!

I think that ought to cover it!

GetTheFlick
9th Oct 2008, 11:41
Greed.

Don Brown

G-CPTN
9th Oct 2008, 11:57
I can easily understand how shares in a company can become 'worthless' if nobody wants to buy them, because confidence in the product or the activity wanes or collapses.
If a business that has been trading starts to fail to pay its bills and then the bank withdraws overdraft facilities then suppliers stop supplying and the business cannot function.
Even stable solvent businesses (that are trading on borrowed money) can fail overnight if the source of the finance is withdrawn and they cannot refinance.

We assume that Banks have money, but, in order to make that money work they have to lend it to others who will pay interest for the use of that capital. If the borrowers are unable to repay (the money might be tied up in raw materials - or, more likely, 'goods in progress, part finished' that are otherwise useless to others) then the Bank cannot repay the deposits to lenders. If the monies (from the Banks) have been invested in property (mortgages) then it takes time to liquidate these assets, and, in a falling property market the sum advanced cannot be recovered, especially if some of the money has been spent on ephemeral expenses such as solicitors fees and taxes such as stamp duty (not to mention any new cars funded from the over-advance against the property valuation).

A Country (in this case Iceland) has provided the currency that the Banks have used to invest in overseas businesses that have maybe not flourished as expected, and recalling that investment (as outlined above) can be impractical or even impossible. It is no secret that Icelandic companies (and individuals) have invested heavily outside Iceland in recent years. Of course, prudent institutions will have insured against such losses, but, if the insurance company is 'dodgy' (and never expected having to meet the liability) they might choose to declare bankruptcy rather than pay.

That is the analysis of someone who is not monetarily-minded (ie me) and may not be complete (or even accurate) but it helps me to begin to understand the current events.

Davaar
9th Oct 2008, 12:24
We assume that Banks have money

Your assumption is firmly based on shifting sand. The banks have little money but pretend they have a lot. When all their creditors ask for payment all at once, the banks' nakedness is immediately exposed. That is when they need James Stewart and that angel chap.

Garethbmw
9th Oct 2008, 12:48
So if i understand it we have all been living off debt,individuals,companies,banks,local goverments and countries.Then the greedy people who lend money in that chain who get paid comission for the more they lend started to lend money to bad risks or sub prime customers.They stuffed the big fat comissions in thier back pockets and all went on holiday.When they got back to the office they found the desk full of memos saying john smith hasnt paid his debt and has spent the money. and then the whole pack of cards has collapsed in on itself from there.

Rossian
9th Oct 2008, 13:01
What bothers me is the probability (nay certainty) that in all these grandiose plans cobbled together in "marathon all-night sessions" there is some F*ck-up factor that no-one has noticed because they're on their knees with fatigue. (See the strain showing on G Broon's face as he made his statement in the commmons yesterday - he looked terrible).
We have rules governing the hours that pilots and lorry-drivers work in case they endanger the public yet the prats who run a whole country are allowed the persist in this macho bullshit which imperils all of us. A good night's sleep and some reflection might save us a lot of pain. But I'm not holding my breath.
The Ancient Mariner

Lon More
9th Oct 2008, 13:07
Lehman market traders gather outside the bank's headquarters to complain about their bonuses being reduced

http://i6.photobucket.com/albums/y204/Badyin/funnies/Lehman.jpg

Scooby Don't
9th Oct 2008, 13:19
Sue has $100 which she puts in IBSD [International Bank of Scooby Don't, see the "what would you do?" thread for info on the CEO] for safe keeping.

IBSD says "thank you" and lends $90 of that to Fred, to start a lemonaid stand.

Fred spends $30 on his stand, and puts $60 in an account with IBSD to save it for when he needs to buy stock.

IBSD lends $50 of that to Arthur.

Arthur starts his own lemonaid stand but runs into difficulties due to a price war with Fred, so he needs to borrow more money.

IBSD sits him down for a nice cup of tea with our loans officer (the other cat, to those who looked at the other thread) and she looks at what we have available to lend.

It turns out that IBSD has $160 of deposits. We've lent $140. That means we have $20 left to lend, right? NO! That $140 is an ASSET and we can lend against it! SO we bail out Arthur for another $100.

This is great for us at IBSD, because we started out with just a $100 deposit, which was actually a liability (we owed it to Sue), but now we have assets of $240 and liabilities of only $160.

At this point we feel we need more assets, so we ring Sue and offer her a personal loan with which to buy cat toys and an inflatable boyfriend [not that I have anything against cat-ladies, but if she spent a bit of time in the gym, got her hair done and maybe got rid of the smell of cat pee, she wouldn't need the inflatable boyfriend...], and she goes for this in a big way. She borrows $100 and withdraws $90 from her account to buy all the toys.

So now, we have assets of $340 and liabilities of only $70. Good God, we're doing well! Bonuses all round!

This is basically how the banking industry works, though with fewer actual cats in positions to make lending decisions.


Now for the stock market!!!

I have this great idea for a company, gleaned from having married a former cat-lady. Had she not found me when she did, she may well have needed an inflatable boyfriend and this makes me think there's a gap in the market place for such a product. Having studied the market and the costs of production, I draw up a business plan and discover that I can start limited production for $5,000, which I borrow from the bank.

Now I'm in business, and it's booming! There are a lot of cat-ladies out there. Still, only a limited number can afford my bespoke inflatable boyfriends. Over a period of 3 or 4 years, my company (Blow Me Inflatable Boyfriends Ltd) has done well. Profits have increased year on year, but to hit the next level we need capital to increase production to a level where per unit cost allows more cat-ladies to benefit, while still allowing me to make per unit profit that keeps the cats fed, the wife in shoes and me able to outsource the writing of poor analogies.

My auditors at Terribly Terribly Boring & Dull, Chartered Accountants, are paid by Blow Me to audit Blow Me. Their job is to make sure my accounts give a "true and fair" picture of the state of the company, and apparently the accounts do just that, with profits rising year on year in a steady fashion. Back in reality, a rash of orders in year 3 was followed by a slight drop in year 4, so I just fiddled with some accruals in the year 3 accounts to reduce the profit that year and display it as year 4 profit. A junior trainee at Terribly Terribly Boring & Dull questioned this with his audit manager, as he should. The audit manager came to see me about it, and I pointed out that Ernst & Waterhouse CooperTouche were willing to do the audit for 20% less the following year. The accounts remained as I had presented them. Nice, that.

So, with my audited accounts showing that I met the requirements of the stock exchange for a listing, I went for an initial public offering, as the Y'Alls would put it, or a floatation in Brit-speak. I kept 20% of the million shares in Blow Me, and floated the rest at $1 per share. Hooray! We now have $800,000 to grow the business with, and my personal holding is worth $200,000.

Now, once we'd invested in increased production facilities, it turned out that we could make a profit of about $500,000 the following year and we duly announced this as our profit forecast, while we had assets in terms of stock, factory, plant, etc of $1 million. The stock market valued the company at 10 times our forecast profit, or $5 per share. I was doing quite nicely with my $1 million fortune. Soon after, other sectors of the market started taking a beating, with profits slumping in the big, blue-chip companies. Investors decided that the needed to diversify into emerging sectors, and so they started buying Blow Me. The stock rose to $15 a share, based on what was little more than a stock popularity contest. I was now worth $3 million!

Imagine my surprise when IBM, suffering as they were from a plummeting stock price but with huge cash reserves, decided to start their own inflatable boyfriend division. They already had expertise in plastics from making so many monitor surrounds and base units, and they converted some of that expertise and capacity to the production of inflatable boyfriends. Having lots of cash for R&D, they installed add-ons that I didn't have the capital to include in Blow Me products, with names like "Morning Glory" and "You Come Firstathon". They lost money on the first 2 million of these inflatable boyfriends, but they had the cash to do so while building up market share.

I tried my best, but I lost market share and I didn't have the luxury of being able to accept losses, but at least I had the Blow Me name and the brand recognition that is so important when selling to cat-ladies. Ultimately though, I had to issue a profits warning as per stock exchange rules, reducing my forecast to a mere $200,000. Had the market valued my stock at 10 times expected profit, the share price would have been been $2 and my fortune would have been worth $400,000. Instead, thanks to the heated desire among investors for IBM [now standing for "International Blow Me" though I'm talking them to court for that] stock, Blow Me stock is down to only $1 per share and I'm back where I started.

I'm feeling very deflated. :bored:

Flypuppy
9th Oct 2008, 13:36
You should start a new product line. The Al Queida Boyfriend. That one blows itself up.

My consultancy bill will be in the post.

SOPS
9th Oct 2008, 13:43
Brilliant Scooby..Just brilliant:ok::D

Blacksheep
9th Oct 2008, 13:46
An excellent analysis of pin-stripe spivvery, Scooby. :ok:Once you've sold your blow-up company to the boys on the NW Frontier for ten times what its worth, you could have a nice career as an Independent Financial Advisor - perhaps lecturing on an MBA course at the LSE as an interesting sideline.

Capt.KAOS
9th Oct 2008, 14:05
Scooby, you should have registered "Blow Me" trade mark, although I seriously doubt you would succeed, as it is a common used expression and that you cannot register unless with a distinguishable logo. So I wouldn't spend your money on lawyers as they most likely will the only one getting money out of it.

In the case you have patented your inflatable boyfriends, then of course it would be wise to see if IBM would have infringed you patent rights.

Otherwise what you've just, brilliantly, described is the free capitalist market, dog eats dog. Niche markets are destinate to be overflooded by copy cats as soon as the markets grow bigger and prices go down. So a wise lesson: always invest a lot of time and capital in new products.

What happened in the financial markets, just 1$ has been passed on a trillion times by the banksters becoming a trillion $ without a proper collateral. What we see now is air escaping out of the inflated (no pun intended) financial markets. Most likely it's the end for many hedge funds which are now selling their shares, causing the current declining stock exchanges. I don't mind, loads of examples of hedge funds are loading perfectly healthy companies they've aquired with lent money of their inflated shares in the real economy with huge debts, no wonder hedge funds in my country are described as "vampires".

Cheers :D

PS Always nice to blame Clinton of everything, this is what Bush said (http://www.youtube.com/watch?v=GkAtUq0OJ68) in 2002 about everybody owning a home in America...

Captain Stable
9th Oct 2008, 14:37
You have two cows. You sell three of them to your publicly-listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with associated general offer so that you get all four cows back, with a tax deduction for keeping five cows. The milk rights of six cows are transferred via a Panamanian intermediary to a Cayman Islands company secretly owned by the majority shareholder, who sells the rights to all seven cows' milk back to the listed company. The annual report says that the company owns eight cows, with an option on one more. Meanwhile, you kill the two cows because the fung shui is bad.

Binoculars
9th Oct 2008, 14:45
I really hope Scooby Don't is not the reincarnation of the obnoxious Scooby Do, but even if he is, that was one of the great posts in JB's history and almost totally accurate. It left out a few intermediate steps like rights issues in which the shareholders are assured that the company is flourishing and with just a coupla more million in the bank shareholders will receive returns they have never dreamed possible, but otherwise was on the money completely.

SOPS
9th Oct 2008, 14:46
The above sounds like Enron, did they sell milk:E

Scooby Don't
9th Oct 2008, 15:11
Why thank you Binos, that's very kind of you to say so. May I assure that I am not, nor have I ever been, Scooby Do, though now you have me wondering if I should have looked up his posts before choosing my nom de keyboard!

tony draper
9th Oct 2008, 15:27
When all this is all over and those who caused the ruckus found out and exposed they should start a thing like the Sex Offenders Register, called obviously the Financial Offenders Register,those listed would be obliged never to go withing 200 yards of any Bank Building Society Stock Exchange or Financial institution of any kind again for the remainder of their days on pain of immediate incarceration.and never again work anywhere that has more than fifty quid on the premises.
Of course when the great post mortem does take place one suspects it will be a few way down in the food chain that takes the blame.
:suspect:

frostbite
9th Oct 2008, 15:33
I've not heard it mentioned anywhere yet, but I feel certain that all the bailouts and borrowing are going to result in a significant currency devaluation?

Don't see how the Pound/Dollar/Euro in your pocket is going to have the same value in days to come.

I Am Not The One
9th Oct 2008, 22:56
So, with the crash of the world financial markets, does that now mean that my 5 Trillion Zimbabwe dollars are now worthless?
:(

Brian Abraham
10th Oct 2008, 04:51
Does all this now mean all those emails I keep getting from those Nigerian financial advisors have some credibility over and above the big name western organisations? :eek: Hang on to your Zim coin, might replace the US dollar as the standard.

Loose rivets
10th Oct 2008, 04:57
This is too true to be funny.

The next time you hear a politician use the
word 'billion' in a casual manner, think about
whether you want the 'politicians' spending
YOUR tax money.

A billion is a difficult number to comprehend,
but one advertising agency did a good job of
putting that figure into some perspective in
one of it's releases.


A.
A billion seconds ago it was 1959.

B.
A billion minutes ago Jesus was alive.

C.
A billion hours ago our ancestors were
living in the Stone Age.

D.
A billion days ago no-one walked on the earth on two feet.

E.
A billion dollars ago was only
8 hours and 20 minutes,
at the rate our government
is spending it.
While this thought is still fresh in our brain...
let's take a look at New Orleans ....
It's amazing what you can learn with some simple division.

Louisiana Senator,
Mary Landrieu (D)
is presently asking Congress for
250 BILLION DOLLARS
to rebuild New Orleans . Interesting number...
what does it mean?

A.
Well... if you are one of the 484,674 residents of New Orleans
(every man, woman, and child)
you each get $516,528.

B.
Or... if you have one of the 188,251 homes in
New Orleans , your home gets $1,329,787.

C.
Or... if you are a family of four...
your family gets $2,066,012.

Washington, D. C
< HELLO! >
Are all your calculators broken??

Accounts Receivable Tax
Building Permit Tax
CDL License Tax
Cigarette Tax
Corporate Income Tax
Dog License Tax
Federal Income Tax < BR>Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel Permit Tax
Gasoline Tax
Hunting License Tax
Inheritance Tax
Inventory Tax
IRS Interest Charges (tax on top of tax)
IRS Penalties (tax on top of tax)
Liquor Tax
Luxury Tax
Marriage License Tax
Medicare Tax
Property Tax
Real Estate Tax
Service charge taxes
Social Security Tax
Road Usage Tax (Truckers)
Sales Taxes
Recreational Vehicle Tax
School Tax
State Income Tax
State Unemployment Tax (SUTA)
Telephone Federal Excise Tax
Telephone Federal Universal Service Fee Tax
Telephone Federal, State and Local Surcharge Ta x
Telephone Minimum Usage Surcharge Tax
Telephone Recurring and Non-recurring Charges Tax
Telephone State and Local Tax
Telephone Usage Charge Tax
Utility Tax
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax

STILL THINK THIS IS FUNNY?

Not one of these taxes existed 100 years ago...
and our nation was the most prosperous in the world.

We had absolutely no national debt...
We had the largest middle class in the world...
and Mom stayed home to raise the kids.

What happened?
Can you spell 'politicians!'

And I still have to
press '1'
for English.

I hope this goes around the
USA
at least 100 times -

What happened?????

V2-OMG!
10th Oct 2008, 05:13
Loose Rivets, I don't usually reply to cuts and paste, but that one really got to me.

Thanks!

Load Toad
10th Oct 2008, 13:07
"Money is the real cause of poverty," said Owen.

"Prove it," repeated Crass.

"Money is the cause of poverty because it is the device by which those who are too lazy to work are enabled to rob the workers of the fruits of their labour."

"Prove it," said Crass.

Owen slowly folded up the piece of newspaper he had been reading and put it in his pocket.

"All right," he replied. "I'll show you how the Great Money Trick is worked."

Owen opened his dinner basket and took from it two slices of bread, but as these where not sufficient, he requested that anyone who had some bread left should give it to him. They gave him several pieces, which he placed in a heap on a clean piece of paper, and, having borrowed the pocket knives of Easton, Harlow and Philpot, he addressed the, as follows:
"These pieces of bread represent the raw materials which exist naturally in and on the earth for the use of mankind; they were not made by any human being, but were created for the benefit and sustenance of all, the same as were the air and the light of the sun."

"Now," continued Owen, "I am a capitalist; or rather I represent the landlord and capitalist class. That is to say, all these raw materials belong to me. It does not matter for our present argument how I obtained possession of them, the only thing that matters now is the admitted fact that all the raw materials which are necessary for the production of the necessaries of life are now the property of the landlord and capitalist class. I am that class; all these raw materials belong to me."

"Now you three represent the working class. You have nothing, and, for my part, although I have these raw materials, they are of no use to me. What I need is the things that can be made out of these raw materials by work; but I am too lazy to work for me. But first I must explain that I possess something else beside the raw materials. These three knives represent all the machinery of production; the factories, tools, railways, and so forth, without which the necessaries of life cannot be produced in abundance. And these three coins" - taking three half pennies from his pocket - "represent my money, capital."

"But before we go any further," said Owen, interrupting himself, "it is important to remember that I am not supposed to be merely a capitalist. I represent the whole capitalist class. You are not supposed to be just three workers, you represent the whole working class."

Owen proceeded to cut up one of the slices of bread into a number of little square blocks.
"These represent the things which are produced by labour, aided by machinery, from the raw materials. We will suppose that three of these blocks represent a week's work. We will suppose that a week's work is worth one pound."

Owen now addressed himself to the working class as represented by Philpot, Harlow and Easton.
"You say that you are all in need of employment, and as I am the kind-hearted capitalist class I am going to invest all my money in various industries, so as to give you plenty of work. I shall pay each of you one pound per week, and a week's work is that you must each produce three of these square blocks. For doing this work you will each receive your wages; the money will be your own, to do as you like with, and the things you produce will of course be mine to do as I like with. You will each take one of these machines and as soon as you have done a week's work, you shall have your money."

The working classes accordingly set to work, and the capitalist class sat down and watched them. As soon as they had finished, they passed the nine little blocks to Owen, who placed them on a piece of paper by his side and paid the workers their wages.
"These blocks represent the necessaries of life. You can't live without some of these things, but as they belong to me, you will have to buy them from me: my price for these blocks is,one pound each."

As the working classes were in need of the necessaries of life and as they could not eat, drink or wear the useless money, they were compelled to agree to the capitalist's terms. They each bought back, and at once consumed, one-third of the produce of their labour. The capitalist class also devoured two of the square blocks, and so the net result of the week's work was that the kind capitalist had consumed two pounds worth of things produced by the labour of others, and reckoning the squares at their market value of one pound each, he had more than doubled his capital, for he still possessed the three pounds in money and in addition four pounds worth of goods. As for the working classes, Philpot, Harlow and Easton, having each consumed the pound's worth of necessaries they had bought with their wages, they were again in precisely the same condition as when they had started work - they had nothing.
This process was repeated several times; for each weeks work the producers were paid their wages. They kept on working and spending all their earnings. The kind-hearted capitalist consumed twice as much as any one of them and his pool of wealth continually increased. In a little while, reckoning the little squares at their market value of one pound each, he was worth about one hundred pounds, and the working classes were still in the same condition as when they began, and were still tearing into their work as if their lives depended on it.

After a while the rest of the crowd began to laugh, and their merriment increased when the kind-hearted capitalist, just after having sold a pound's worth of necessaries to each of his workers, suddenly took their tools, the machinery of production, the knives, away from them, and informed them that as owing to over production all his store-houses were glutted with the necessaries of life, he had decided to close down the works.

"Well, and wot the bloody 'ell are we to do now ?" demanded Philpot.

"That's not my business," replied the kind-hearted capitalist. "I've paid your wages, and provided you with plenty of work for a long time past. I have no more work for you to do at the present. Come round again in a few months time and I'll see what I can do."
"But what about the necessaries of life?" Demanded Harlow. "we must have something to eat."
"Of course you must," replied the capitalist, affably; "and I shall be very pleased to sell you some." "But we ain't got no bloody money!"

"Well, you cant expect me to give you my goods for nothing! You didn't work for nothing, you know. I paid you for your work and you should have saved something: you should have been thrifty like me. Look how I have got on by being thrifty!"
The unemployed looked blankly at each other, but the rest of the crowd only laughed; and then the three unemployed began to abuse the kind-hearted capitalist, demanding that he should give them some of the necessaries of life that he had piled up in his warehouses, or to be allowed to work and produce some more for their own needs; and even threatened to take some of the things by force if he did not comply with their demands. But the kind-hearted capitalist told them not to be insolent, and spoke to them about honesty, and said if they were not careful he would have their faces battered in for them by the police, or if necessary he would call out the military and have them shot down like dogs, the same as he had done before at Featherstone and Belfast.

Taken from The Ragged Trousered Philanthropist by Robert Tressel