Thursday, October 2, 2008

Monkey Business

I stole the following story from Jane Wells at CNBC, but I did it because I thought it was a very good explanation of the current economic problems. This story was apparently sent to Jane Wells by an author from Bangalore who seems to grasp the ins and outs of Wall Street's packaged financial products, and their implications, better that most:

"Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy monkeys at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it! The man now announced that he would buy monkeys at $50 each! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has already collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each." The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant again, only lots and lots of monkeys! Now you have a better understanding of how the stock market works."

p.s. it might seem kind of cute to have lots of monkeys in your village, but since this is written from an Indian perspective, you have to know that monkeys in India can take over villages and be violent as a result of being seen as holy. The implication of having all these monkeys is hence meant to be very negative. Last year, an Indian politician who had opposed monkey control was pushed to his death off his balcony by a monkey.

p.p.s. a CNBC reader suggested the following conclusion to the story, which is actually an outstanding explanation of the bailout package:

"The mayor of the village then mandated that they would use the villagers' tax money to keep the monkey business going, even though there was no one there who was interested in buying the monkeys"

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