Saturday, February 27, 2010

If you still don't understand Wall Street

Despite the two years of non-stop information about the financial crisis, I still find that many do not understand how our financial system really works. I hope that this old fable, will demystify Wall Street for you, once and for all.
Once upon a time in a village in India, a man announced to the villagers that he would buy monkeys for $10. The villagers seeing there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10, but, as the supply started to diminish, the villagers stopped their efforts.
The man further announced that he would now buy at $20. 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 rate increased to $25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now act as buyer, on his behalf.
In the absence of the man, the assistant told the villagers: 'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when he returns from the city, you can sell them back to him for $50.'
The villagers squeezed together their savings and bought all the monkeys back.

1 comment:

Guzzo said...

Heh, heh.. very good.