Home / Humour / Economic models explained, including the credit crisis

Economic models explained, including the credit crisis

There's a really old joke about cows that explained different economic models.

You probably have seen it, but just in case:

SOCIALISM

You have two cows.

You give one to your neighbour.





COMMUNISM



You have two
cows.

The State takes both and gives you some milk.





FASCISM

You
have two cows.

The State takes both and sells you some milk.





TRADITIONAL
CAPITALISM



You have two cows.

You sell one and buy a bull.

Your
herd multiplies, and the economy grows.

You sell them and retire on
the income.






All well and good. 

Now the last time I saw this, it had been updated to include the Enron crash back in 2001, which reflected the use of venture capital to farm:

VENTURE CAPITALISM


You have two cows.


You sell three of them to your publicly listed company, using letters
of credit opened by your brother-in-law at the bank.

You then execute a
debt/equity swap with an associated general offer so that you get all
four cows back, with a tax exemption for five cows.



The milk rights
of the six cows are transferred via an intermediary to a Cayman Island
Company, secretly owned by the majority shareholder, who sells the
rights to all seven cows back to your listed company.



The annual
report says the company owns eight cows, with an option on one more.

You sell one cow to buy a new president of the United States, leaving
you with nine cows.



The
public then buys your bull.



Excellent!

Could we update this to reflect the credit crisis?

LEVERAGED CAPITALISM

You have two cows and use them as capital to get another 100.

You need the 102 cows to have a better barn, and so you go to the bank who offer you a cheap loan to build a barn.

You build the barn using the 102 cows as collateral.

The barn is built, and so you think you could build more barns for other farms, and go to the bank to discuss.

The bank gives you funding to build another 50 barns, using leverage based upon the barn you now own.

You build 50 barns, and the bank offers cheap loans to the farmers to buy your barns off you, on the basis that they also have cows as collateral.

Then the guy you bought the 100 cows from demands the full payment, causing you to sell the two cows you originally owned as capital.

Realising you only had enough to pay for two cows, you are forced to return the other 100.

The loss of the 102 cows leaves you with an empty barn.

The farmers cannot pay for them either, as there are now too many cows on the market and they cannot sell any of their own to pay for the barns you built for them, which they didn't need anyway.

You're left with no cows and 51 barns you cannot use, but need to pay for.

The State believes farming is good, so they give you the money to pay for the barns, as well as two cows to get you started.

You have two cows and are now very wealthy having sold 51 barns.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

Check Also

Is self-service all it’s cut out to be?

I find it amusing to think about this age of self-service, where we take it …

  • Len

    And, because the other farmers couldn’t pay for the barns, you not only have the money from the state for the 51 barns, you also have the barns themselves (because the state doesn’t want the barns, so just bails you out).

  • Len

    And, because the other farmers couldn’t pay for the barns, you not only have the money from the state for the 51 barns, you also have the barns themselves (because the state doesn’t want the barns, so just bails you out).