Share on Google Plus Share on Twitter Share on Facebook Share on LinkedIn Share on PInterest Share on Fark! Share on Reddit Share on StumbleUpon Tell A Friend 1 (1 Shares)  
Printer Friendly Page Save As Favorite View Favorites View Stats   2 comments

OpEdNews Op Eds

A Simple Analogy of the Housing Collapse

By (about the author)     Permalink       (Page 1 of 1 pages)
Related Topic(s): ; ; ; , Add Tags Add to My Group(s)

View Ratings | Rate It

opednews.com

- Advertisement -
There has been much confusion with all of the different explanations as to how we got ourselves into this housing collapse. The following is a simple story that may shed some light on the events.  Big Jimmy's Liquor Store had been a fixture in Jonesville for over twenty years. Big Jimmy was as you might suspect, a rather robust, affable man, who never met a stranger. Small town life suited him just fine and he felt like he was friends with the entire town. One of his close friends, Clive, started up Clive's Liquor Store about ten years ago. There was plenty of business to go around, so business never got in the way of their friendship.    As we all will eventually, Big Jimmy passed on and "Lil" Jimmy took over the business. "Lil" Jimmy was a bright young man with big ideas and he was not satisfied with the status quo at the store. In fact, he had always resented Clive for opening another store and it now became his mission to drive Clive out of business. His plan was simple. He would start selling his liquor on credit in order to accomplish two goals. One, he wanted to give Clive's customers a reason to come to him. Two, he wanted everyone to use the credit and buy more liquor. He figured if he made it easy to buy more, they will drink more. "Lil" Jimmy's plan worked like a charm. Most of the town began buying their alcohol from him on credit and sure enough, they all began to buy more than usual. As I have already mentioned, "Lil" Jimmy was pretty smart. He made his customers fill out credit forms and sign a contract promising to pay for their purchase by a specific future date. This caught the attention of Gabe, his best friend who ran The Bank.  Gabe convinced "Lil" Jimmy to take out a large loan backed by the future revenues he would receive in his credit contracts. With all the money from the loan "Lil" Jimmy tripled the size of the store and created Big Jimmy's Liquor Emporium. The Bank was happy because their loans were securely guaranteed. If "Lil" Jimmy could not pay up they would collect from the customer. Then Gabe got an even better idea; he sorted the contracts by their issue due date, issued bonds and sold them around the world. These liquor store bonds were deemed AAA safe and secure, so money began pouring in to buy them. Bond holders enthusiastically began re-packaging and selling these bonds to other investors. No one really knew what these bonds were all about, but they had an AAA rating and they were backed up by The Bank, so how could you lose? The value of these bonds continued to climb and there were no shortage of buyers.  Eventually the bonds would come due and The Bank needed to collect from either "Lil" Jimmy or his customers. Unfortunately, his customers had all become hopeless drunks and they could not pay "Lil" Jimmy anything. "Lil" Jimmy had to file bankruptcy, as did most of his customer's and suppliers. In the end, the price of the bonds dropped by over 95% and The Bank was tipping towards insolvency. Just in the nick of time, it was rescued with the money of the town's non-drinkers.   
- Advertisement -
- Advertisement -

 

Pete Latona enjoyed a lengthy sales management career with AT&T and retired in 2006 to form his own consulting business. He currently resides in Edmond, Oklahoma with his wife Nancy.

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon


Go To Commenting

The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Writers Guidelines

Contact Author Contact Editor View Authors' Articles
- Advertisement -

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

Bernie Madoff...Come On Down!

Are Baseball Players Paid Too Much?

Ed Whitacre: Poor Choice for General Motors

I Thought I Was Retired But I Am Now Unemployed

Why Obama's Economic Plan Will Fail

The Butterfly Effect

Comments

The time limit for entering new comments on this article has expired.

This limit can be removed. Our paid membership program is designed to give you many benefits, such as removing this time limit. To learn more, please click here.

Comments: Expand   Shrink   Hide  
2 people are discussing this page, with 2 comments
To view all comments:
Expand Comments
(Or you can set your preferences to show all comments, always)

The Towns non-drinkers don't have any money, they'... by Nemo on Saturday, May 9, 2009 at 10:31:15 PM
Thank you for the response... by Pete LaTona on Sunday, May 10, 2009 at 9:55:47 AM