"It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit. On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a 100€ note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the 100€ note and runs next door to pay his debt to the butcher. The butcher takes the 100€ note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the 100€ note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the 100€ note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the 100€ note. The hotel proprietor then places the100€ note back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the 100€ note, states that the rooms are not satisfactory, pockets the money and leaves town. No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism. And that, ladies and gentlemen, is how the bailout package works.
It’s a neat little story, but there are two problems with it. First, nobody in it is actually in debt – not net debt, anyway. Their net balance sheet is zero. Take the butcher. He owes the pig farmer €100, but is owed the same amount by the hotel owner. And so on for all the Irish characters. Second, I am not sure how appropriate it is to dwell on the underlying message of the story. What does the story really tell us? For one thing, it reveals the way a bit of liquidity (the German's ready cash) oils the wheels of the economy. That is a perfectly sensible thing to point out - normally. But you don’t have to be a Ph.D. in economics to realise that pumping in too much cash will overheat the economy. Too much liquidity will jack up demand and ultimately create a bubble. Sound familiar? Well, of course that is what happened in Ireland in the boom years: the housing sector floated high on oceans of liquidity, and then when someone pulled the plug the result was a bust, and a bunch of crippled banks. The rest is Irish history. So moral of the story, if you will, is actually a dangerous one – and certainly not the one the story-teller had in mind. Mind you, if the rich German had had the presence of mind to demand an interest rate based on the average of 5.83 percent the Irish will have to pay for their bailout, the conclusions might be different. But it’s still a good story – so why let dreary old economics spoil it?
Right. I have no idea how it relates to bailouts but it was a neat story. I really thought you would bring Bush into it, though.
Did you catch the bit on the Hundred dollar bills today? $120.00 billion (maybe it was million) wasted on bills printed that now have to be burned? Looked for it and it may have been pulled but supposedly the "new" bills were SO high tech the printers couldn't print them. This, of course, realized after MANY were "printed". Now that's a "bailout". EDIT: Just found it. Swear I thought about you when I read it earlier. Printing error puts new $100 bill on hold | Marketplace From American Public Media Da hell Red, can't your pres make money ANY way.
The problem with this entire story is, Bailouts don't work, so the title of "How Bailouts Work" in itself is false. The story however is cute.
