Mary's Bar - A Modern Economics Lesson - It would be funny, if it weren't also "true".
Author Unknown, Edited by Alan Tarr
The Story Begins
Mary is the proprietor of a small neighborhood bar with one slight challenge.
She realizes that virtually all her customers are being let go from their jobs. It hits her that these unemployed alcoholics will no longer be able to afford afford to drink at her establishment, thus reducing her revenues. To solve this problem, Mary comes up with a catchy new marketing idea that allows her customers to drink now, but pay later. It works like this: Mary keeps track of the drinks consumed in a ledger (in effect, granting the customers' loans). Her customers agree to repay her "as soon as they get jobs and get back on their feet". In fact, her customers are so grateful, they tell all their friends about Mary' Bar. Thus, the word spreads about Mary's "drink now, pay later" marketing strategy, and as a result, more customers flood into Mary's bar.
Soon she has the largest sales volume of any bar in town.
A Slight Problem
Mary's new policy increased her gross revenues and accounts payable.
Unfortunately, her cash flow is catastrophically poor. Mary can't pay her bills with IOUs. So, she gets anothr brainstorm. Since her customers aren't paying for the drinks, she gets no resistance when, at regular intervals, she substantially increases her prices. Consequently, Mary's gross sales volume increases more and more. A young and dynamic vice-president at the local bank branch recognizes that these customer debts constitute valuable future assets and increases Mary's borrowing limit. He sees no reason for any undue concern since he has the debts of the unemployed alcoholics as collateral.
So...all is good.
What Happens When The Banker's Bosses Are Made Aware Of The Economic Lesson Plan?
Well, of course they go stark raving mad.
At the bank's corporate headquarters, their expert securities traders figure a way to make huge commissions from Mary's indebtedness. These Wall Street types transform the customer loans into a new product called DRINK BONDS. These "securities" are then bundled and sold to other traders and then sold to investors via international securities markets.
The bankers are happy; Mary is happy. All is good again.
If All This Seems Like "Pie In The Sky Stupid" To You - You're Probably Normal
But not even all normal people are normal all the time.
Naive investors didn't really understand the securities being sold to them as "AAA Secured Bonds" were really 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.
Then, one day, even though the bond prices still are 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 Mary's bar.
And so, the Economic Lesson
"All things come due eventually".
After being notified by her banker, Mary then demands payment from her patrons, but most being still unemployed alcoholics, they cannot pay back their drinking debts. Since Mary cannot fulfill her loan obligations, she is forced into bankruptcy. The bar closes and Mary's 11 employees lose their jobs.
This creates more unemployed people in Mary's town - including Mary.
What Goes Up...
Overnight, the DRINK BOND prices drop by 90%.
The collapsed bond asset value destroys the bank's liquidity, and prevents it from issuing new loans, thus freezing credit and economic activity in the community. Mary's suppliers had granted her generous payment extensions and had invested their firms' pension funds in the DRINK BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.
- Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations.
- Her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Is there no one or no company that can escape this economic typhoon?
Economic Lesson: Rejoice The Survivors
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 the government.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, nondrinkers who have never been in Mary's bar.
And the moral of the story is...
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