The situation in Europe continues to deteriorate, but the citizenry have no illusions about being able to control the way it plays out. So instead, they treat it all like the joke it is. From Galvez - temporarily toiling away as a missionary in the wilds of darkest academia:
It is a slow day in a sunny little Spanish town. The sun is streaming down and the streets are deserted. But 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 bar.
The bar owner 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 the €100 note back on the counter so the rich traveller will not suspect anything.
The traveler 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, is how bailouts work.
3 comments:
Tom,
I'm in full agreement that bailouts don't generally further productiveness. But doesn't this scenario exemplify a functioning credit market, not a dysfunctional one? After all, couldn't we assume that none of the individuals involved would have engaged in any productive activities had the prospect of credit been unavailable?
The willingness of counterparties to go into debt and commit themselves to obligations to repay probably motivated/permitted the farmer to raise an animal, the butcher to slaughter it, the bartender to serve liquor, the prostitute give her services, and the hotelier his--all products or services of manifest value given the revealed preferences of the townsfolk.
The "bailout" didn't add productivity in itself, but if there was no assumption it would have been given, and credit had consequently been tighter inititally, no-one would have produced as much of value to begin with. Right?
Would you mind clarifying this for us?
I know this is a different (albeit related) topic, but the example reminds me of the whole multiple-deposit money creation lesson back in intro to macroeconomics class. Could you describe how the bailout phenomenon "Galvez" described relates to that topic?
Thanks.
Easy buddy - it's a joke. Although I do get your point, this almost makes a bailout seem like it would be OK.
A better example would be if the hotel keeper were a politician who (temporarily) pilfered the $100 from the man's wallet while he was in the shower, and the whore was really a Goldman Sachs investment banker. Then all you need is to drag the butcher, pig farmer, feed supplier and barkeep in front of a congressional committee to explain their anti-social 'greed' and why they flew their private jets around town and it would be just like real life.
I didn't mean to belabor the vignette--which was funny. As you wrote, it doesn't make the bailout seem too bad. And (perhaps just as funny) it actually put me in mind of a friend who gives examples like that one to ridicule paper shuffling and financial capital in general.
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