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Tuesday, March 24, 2009

Geithner as Head Pretzel-Vendor

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." - Marcus Tullius Cicero

Maxwell and I were discussing the current state of affairs in the world, and Maxwell was trying to trying to reconcile a 'debt-consolidation' metaphor he had constructed with the latest act in The Fall of the House of Geithner, and he asked for my take on things. I really tried to avoid doing the requisite blog-post-about-the-financial-crisis, but it seems to have been unavoidable. The following, with some minor cleaning up, are my thoughts on the subject.


Eh, the initial 'bailout' was more like lending your brother money so he can buy gas to go to work, since he's short on cash at the moment. Obviously, if he can't get to work, he can't make any money, so you give him the cash, and hope he pays you back.

But, since you don't actually have the cash on hand (or rather, you do have the cash, but you already have a bunch of loans outstanding to your neighbors (i.e. China, among others), you basically take out another loan so you've still got 'enough' cash on hand. Keep in mind that, in many situations, this actually makes sense (that is, it's not quite as insane as it seems). If your brother is going to pay you back $10 (i.e. a %200 return on your investment, before adjusting for the fact that it'll take some time to get the $10), then it make sense if your neighbors are only charging you, say, %5 interest.

What's going on now, and what was proposed originally, is that your brother bought a bunch of... um... Pretzel Wagon franchises. He thought the franchises would be making him lots of money, and that he'd eventually be able to sell them, but now, because he apparently misjudged how many pretzels people can afford, the franchises are worth a lot less.

Of course, the phrase "worth a lot less" is not really true. What it means is that the franchises are making a lot less money, but your brother is claiming they're still worth, say, $100 each. He's trying to sell them, but everyone else seems to think they're worth $30, so he doesn't want to sell them. Likewise, he doesn't want to admit that they're only worth $30 ('worth X' here meaning, 'people in the market are willing to pay X for them').

Of course, the whole thing is made worse by the fact that, because your brother is worried, he's not opening new franchises, and therefore not hiring people in town, and so people in town have, on average, even less money to spend on pretzels.

So, what do you do? Well, Geithner, as well as a number of other apparently intelligent people, have decided that we're going to hold a garage sale. But not just any garage sale. Here's what we do:

You tell people that you're selling your brother's franchises (at least, the ones that aren't doing well), but that you'll loan them most of the money to buy them. So, say Bob decides that one such franchise is worth $50, but he doesn't have that kind of cash on hand. "That's ok!" you say, and lend him $44, on pretty good terms. What's more, you agree to basically agree to cover half the remaining amount, and give him $6 more, in exchange for a partial ownership in the franchise. The end result is that he ends up putting up about $6 for something (apparently) worth $50.

But this isn't as crazy as it seems -- well, not quite as crazy. First, it assumes that your brother will be ok, once he sells off the bad franchises. Of course, this plan does nothing to address the fact that your brother is apparently an idiot, or at least, managed to a make a LOT of bad calls, all at once. Second, if the $50 purchase price is 'about right' -- that is, if the Pretzel Wagon ends up making about the same amount of money as $50 spent somewhere else, say, on a Mrs. Field's franchise, would have -- then things are pretty much okay. Bob will eventually pay back the loan and you'll get repaid, plus, because of that $3 you put up, you'll end up getting a cut of the profits. Of course, if the thing fails, and Bob never pays you back, or if the franchise ended up only being worth, say, $30, then you're pretty much screwed. Bob's not too upset, especially if he manages to get out of paying back the loan, since he only lost about $3. You, on the other hand, have lost $47. And your brother, who managed to sell off a worthless piece of junk for $50, is loving the whole setup. Stupid freeloader.

Of course, there's always the opposite possibility, where the thing ends up being worth $200, in which case Bob and you are both thrilled, and, in the end, your brother isn't too upset, since he needed cash at the time, and he's just happy to be rid of the whole mess.

And, throughout all of this, your neighbors (China, et al.), are wondering if you've completely lost your mind, or if there's actually something sensible, in an odd, twisted way, about your relationship with your brother. Of course, they'll keep lending you money throughout the whole thing; you may be paying it off for the rest of your life, but they know you'll pay it off. Plus, who's gonna buy the crap at their craft store, if you and your brother are bankrupt?

-- Tiro

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