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Some of us have had a problem understanding the current global recession. I thought it might be worthwhile explaining it in simple terms.
THE CURRENT ECONOMIC CRISIS EXPLAINED
Phajja is the proprietor of a Siri-Paya & Nehari shop (restaurant) 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 a ledger.
Word gets around and as a result increasing numbers of customers flock to PHajja’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 dont 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. Atta (flour) supplier is taken over by a competitor; Phajja lays off the cooks and other 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 (meals served at the restaurant).
UNDERSTOOD?
THE CURRENT ECONOMIC CRISIS EXPLAINED
Phajja is the proprietor of a Siri-Paya & Nehari shop (restaurant) 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 a ledger.
Word gets around and as a result increasing numbers of customers flock to PHajja’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 dont 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. Atta (flour) supplier is taken over by a competitor; Phajja lays off the cooks and other 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 (meals served at the restaurant).
UNDERSTOOD?
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