The Parable of Heidi's Bar or Financial Armageddon Explained in Laymans Terms

I can't take credit for this piece.  I lifted it from another website that I read obsessively.  Here's the link by way of attribution.

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed in a ledger (thereby granting the customers loans).
Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.
By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.
Consequently, Heidi's gross sales volume increases massively. A young and dynamic Vice President at the local bank recognizes that these customer debts constitute valuable future assets, and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
 Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.
 Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations, she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs. Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with not only having to write off her bad debt but also with losing over 90% of the presumed value of the bonds. Her wine supplier claims bankruptcy, closing the doors on a family business that had endured for three generations, and her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar, no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi's bar.

Jess

Healthcare--It Comes Down to Trust

Here we are almost halfway through the month of March, and we are still living with the specter of Congress passing a sweeping government takeover of the health care system in this country.  We thought this horrible idea was dead and buried after Scott Brown's election in Massachusetts in January, but Congressional Democrats are still dragging around the dead carcass of "insurance reform" despite the clear message from the American people.  Liberal pundits are in denial about the rejection of this proposal by the electorate.  They keep saying things like, "Polls show that the American people are in favor of many of the elements in this bill".  And that's certainly true.  As Americans, we're a generous and caring people.  We'd all like to see 30 million people get health insurance who don't have it now.  We'd all like people with pre-existing conditions to have the opportunity to get affordable health care.  We'd all like to see health care costs go down and deficits shrink.  The problem is, most of us know that there is no such thing as a free lunch. The president and Congressional Democrats are trying to tell us there is.

I'd be perfectly happy to spend the next several paragraphs arguing about this or that detail of the health care plan.  I've spent plenty of time doing just that with friends and family.  But to be honest, that's just beating a dead horse.  By now, we've all made up our minds on the merits or lack thereof in this health care package.  I could propose lots of better alternatives.  Less comprehensive, perhaps, but more affordable, and a step in the right direction.  I believe the Republicans have done just that.  It's all old news by now.  So let's cut to the chase.  The main reason to defeat this monstrosity is simple.  We, the American people, do not believe that those in government will not screw this up.  GOVERNMENT--WE DON'T TRUST YOU!!

It all boils down to trust.  We don't believe members of Congress are smarter than us.  We don't believe they are better informed than us.  We doubt many in Congress have even half the integrity of the stereotypical used car salesman.  (No offense to used car salesmen).   We don't trust the motivations of our lawmakers.  The way Congress has handled the financial crisis with huge bailouts and politically driven crony capitalism has only served to highlight the mediocrity of America's leadership these days.  They are presiding over an economic meltdown right before our eyes, and yet the political class has the nerve to say, "Trust us.  We know what we're doing."   That would have been a bad wager a few years ago.  Today, it's more like a suckers bet.

We don't like the plan!  Even if we're wrong, and it's a great plan, we don't trust you to execute the plan without screwing it up.  And even if it's a great plan and you execute it to perfection, we don't believe you can do it without ballooning an already out of control budget  into the stratosphere.  There are just so many levels on which to object to Obamacare.  Substantive reasons.  Ideological reasons.  Practical reasons.  Economic reasons.  Procedural reasons.  Take your pick.  Democratic health care reform fails the smell test any way you look/sniff at it.

 In January, Democratic health care reform had one foot in the grave.  Scott Brown's election looked like it would seal the deal, but the ghost has come back to life.  Its time to drive a stake through the heart of Obamacare once and for all and start covering the grave.  This is one piece of legislation that should be declared shovel ready.

Jess

Listen to New Jersey's Governor

Here's a link to an address by New Jersey's new Republican governor Chris Christie.  About twenty five minutes.  I thought it was impressive.  Can a politician live up to the rhetoric?  He sounds sincere.  I hope the task isn't too much to achieve.

Jess

News from 1930

Here's a link to an interesting blog I came across.  This fellow has been publishing, every day, a summary of the Wall Street Journal from the corresponding day in the 1930's.  He started this last year.  So in other words, today being March 1, 2010, his blog post is a summary of the Journal from March 1, 1931.  And it's not just market news, but politics, personalities, entertainment, and advertising.

If you click on the entry "Just What Is The Point of This Blog?" at the top right hand side of his home page, he explains by paraphrasing Mark Twain that while history doesn't always repeat itself, it often rhymes.  A daily reading of the Journal from the 1930's does show many similarities between then and now, such as a precipitous market panic, followed by recovery, followed by another drop.  And all the while, lots of pundits were proclaiming the crisis was over when the worst was yet to come.  It's fascinating to see how many knowledgable people didn't see what was happening to them as they were sitting right there at ground zero.  Very interesting reading from both a market perspective, and a historical perspective.

Jess

Bending the Health Care Cost Curve Down

I read a great line in an article by Cato's Michael Tanner.  He explained that of all the money spent on health care each year, only about 13% of it comes from the pocket of the consumer of that health care.  The rest of the money comes from the government or private insurance plans.  Such a system has the effect of skewing the market toward the consumption of more health care at higher cost to all parties.  If someone else is paying the bill, there is no incentive to make prudent choices in the consumption of health care.  Or as Mr Tanner writes:

Think of it this way. If every time you went to the grocery store, someone else paid 87 percent of your bill, not only would you eat a lot more steak and a lot less hamburger - but so would your dog. And food costs would go up for everyone.

Here's a link to a Wall Street Journal article by Indiana's Republican Governor Mitch Daniels talking about his state's experiment with Health Savings Accounts.  These plans incentivise consumers to spend wisely by providing less expensive high deductible medical insurance while putting money in an account that belongs to each insured person to be used for routine medical expenses.  If there is money left over at the end of the year, it belongs to that insured beneficiary. 

When you're spending your own money instead of someone elses, you're bound to spend it more wisely.  This brings everyone's costs down.

Jess