The Parable of the Pecan Tree
You have worked hard. You have a few dollars in a bank account for a rainy day. One day, your next door neighbor sees you in the yard and beckons you over. He explains to you that he is thinking of planting a pecan tree on his property between your two homes. He says that the tree will provide delicious nuts in the fall and good shade in the summer.
Your
neighbor says, however, that he is a few dollars short of enough money
to buy a small tree from the nursery, but was wondering if you would
like to invest a bit of your savings in the tree, and thereby share in
it’s benefits in the future. (Common Shares) This sounds like a small
price to pay for some pecans, which you love, and shade in the future,
so you agree.
After several years the neighbor explains that he would like to fertilize and water the tree more and wonders if you would like to invest a few more dollars in a minor share of that work. He explains that the tree will grow much larger, and faster, and provide a nice shady spot for you both to put your chairs in your old age (401k, IRAs, etc.).
Later, your neighbor explains that he is loaning out a portion of the pecans to several people who bake in the neighborhood, and in return they will bring back some delicious pecan pies as payment. He goes on to ask if you would like to invest some of your share of the pecans in this endeavor (Mortgages).
In a few years, the much larger tree yields so many pecans that the neighbor is getting many more pies from the bakers than he can eat, so he gathers up these extra pies and sells these at the farmers market (Mortgage Bundles, and Mortgage Backed Securities). He doesn’t ask you to share in this scheme. But, he asks your daughter to work at his stall at the farmers market, so you don’t complain. She uses the money; along with some she borrows from your neighbor at a high interest rate, to go to school at night to finish college. The college your daughter is going to realizes that she can borrow all the money she asks for, so the college raises the tuition by astronomical amounts each year (Student Loan Programs).
That next fall, after he fertilizes the soil and the leaves fall around the tree, the neighbor’s dog is sniffing and digging at the base of the tree. The neighbor pulls his dog’s nose out of the hole and notices strange black lumps in the shallow dirt under the leaves. He pulls them out of the ground and looks them up on Google; they are black truffles! (Derivatives and Securities) He learns they are worth a fortune. He takes these to the farmers market and has your daughter sell them for a lot of money. Chefs are clamoring for more! He tells the chefs to leave a deposit and they can have first claim on the next truffles he digs up next fall (Mortgage Insurance, Reinsurance, REITs).
The next fall, as he is digging around the base of the tree for black truffles, he notices a curious white lump occasionally. He takes this to the farmers market and the white truffles sell for even more money! (Collateralized Debt Obligations, Credit Default Swaps, and other exotic securities) He rushes home and greedily digs all around the base of the tree, digs along all the roots, and even rents an excavator to explore every last inch of the soil. (Adjustable Rate Mortgages, Low-Doc Mortgages, Second Mortgages, Sub-Prime).
That very night it rains. With the roots of the tree unable to find a purchase in the wet, loose soil, the tree comes crashing down on both of your houses!
Your neighbor comes to your door and explains that he is truly sorry, but he owes a lot of money to these chefs. Also, he must rebuild his house and replant the tree. You decide that this relationship was good for so many years that you agree to bail him out. (TARP) Heck, you are such a good person; you aren’t even going to charge interest! (Quantitative Easing) You are later surprised to find out the bill for fixing his house is about 100 times yours. He explains that with all that extra truffle and pie money, which he didn’t share with you, he had put many luxury items in his house and had renovated the whole place. He had millions (Trillions) of dollars of stuff that you didn’t really pay attention to over the years.
This news bothers you a bit, but you are so far in now you feel like you don’t have a choice. So, when he comes over later for more money to replant the tree and clean up the old mess, you give it. (Emergency Economic Stabilization Act of 2008)
The following fall he says he needs a bit more money at zero interest and more time because the new tree is small and hasn’t grown any pecans yet. He also informs you that he is going to have to lay off your daughter, who has worked for him at his stall in the farmers market, and can’t provide you any pecans going forward. (Quantitative Easing II, Recession and Unemployment)
Your daughter eventually finds a job that pays far less than she needs to pay off her school loan to your neighbor, but it is all that is available. Your savings are completely depleted. You have had to borrow some money at a high interest rate from another neighbor to finish repairs on your house because you had to help your daughter out with her bills. But, you figure when things get back to normal you can pay this loan off and your daughter can contribute (2009, 2010 Recession).
The next fall, your neighbor pays you back the money he borrowed to rebuild his house and replant the new tree, without interest. You use this to pay back the loan you took to repair your house. Your neighbor also gives you the $2 you loaned him in the beginning for the purchase of the first tree. He explains that the money you both put in to fertilize and water the old tree is a total loss, which you will both share. He says that he is free and clear and doesn’t need your help anymore (Q1.Q2 2011).
However, he cheerfully tells you that he is getting a new large screen TV for himself with the money he has made from your daughter’s loan payments. He explains that thanks to your interest free bailout, he didn’t have to dip into his retirement money or sell any of his vast fortune. He also says that as a bonus for making it through these hard times he is treating himself to a vacation to Europe (Q3 2011 Reports). Then he asks why your under-employed daughters, and her unemployed baker friends, are protesting in his front lawn (Occupy Wall Street)?
After several years the neighbor explains that he would like to fertilize and water the tree more and wonders if you would like to invest a few more dollars in a minor share of that work. He explains that the tree will grow much larger, and faster, and provide a nice shady spot for you both to put your chairs in your old age (401k, IRAs, etc.).
Later, your neighbor explains that he is loaning out a portion of the pecans to several people who bake in the neighborhood, and in return they will bring back some delicious pecan pies as payment. He goes on to ask if you would like to invest some of your share of the pecans in this endeavor (Mortgages).
In a few years, the much larger tree yields so many pecans that the neighbor is getting many more pies from the bakers than he can eat, so he gathers up these extra pies and sells these at the farmers market (Mortgage Bundles, and Mortgage Backed Securities). He doesn’t ask you to share in this scheme. But, he asks your daughter to work at his stall at the farmers market, so you don’t complain. She uses the money; along with some she borrows from your neighbor at a high interest rate, to go to school at night to finish college. The college your daughter is going to realizes that she can borrow all the money she asks for, so the college raises the tuition by astronomical amounts each year (Student Loan Programs).
That next fall, after he fertilizes the soil and the leaves fall around the tree, the neighbor’s dog is sniffing and digging at the base of the tree. The neighbor pulls his dog’s nose out of the hole and notices strange black lumps in the shallow dirt under the leaves. He pulls them out of the ground and looks them up on Google; they are black truffles! (Derivatives and Securities) He learns they are worth a fortune. He takes these to the farmers market and has your daughter sell them for a lot of money. Chefs are clamoring for more! He tells the chefs to leave a deposit and they can have first claim on the next truffles he digs up next fall (Mortgage Insurance, Reinsurance, REITs).
The next fall, as he is digging around the base of the tree for black truffles, he notices a curious white lump occasionally. He takes this to the farmers market and the white truffles sell for even more money! (Collateralized Debt Obligations, Credit Default Swaps, and other exotic securities) He rushes home and greedily digs all around the base of the tree, digs along all the roots, and even rents an excavator to explore every last inch of the soil. (Adjustable Rate Mortgages, Low-Doc Mortgages, Second Mortgages, Sub-Prime).
That very night it rains. With the roots of the tree unable to find a purchase in the wet, loose soil, the tree comes crashing down on both of your houses!
Your neighbor comes to your door and explains that he is truly sorry, but he owes a lot of money to these chefs. Also, he must rebuild his house and replant the tree. You decide that this relationship was good for so many years that you agree to bail him out. (TARP) Heck, you are such a good person; you aren’t even going to charge interest! (Quantitative Easing) You are later surprised to find out the bill for fixing his house is about 100 times yours. He explains that with all that extra truffle and pie money, which he didn’t share with you, he had put many luxury items in his house and had renovated the whole place. He had millions (Trillions) of dollars of stuff that you didn’t really pay attention to over the years.
This news bothers you a bit, but you are so far in now you feel like you don’t have a choice. So, when he comes over later for more money to replant the tree and clean up the old mess, you give it. (Emergency Economic Stabilization Act of 2008)
The following fall he says he needs a bit more money at zero interest and more time because the new tree is small and hasn’t grown any pecans yet. He also informs you that he is going to have to lay off your daughter, who has worked for him at his stall in the farmers market, and can’t provide you any pecans going forward. (Quantitative Easing II, Recession and Unemployment)
Your daughter eventually finds a job that pays far less than she needs to pay off her school loan to your neighbor, but it is all that is available. Your savings are completely depleted. You have had to borrow some money at a high interest rate from another neighbor to finish repairs on your house because you had to help your daughter out with her bills. But, you figure when things get back to normal you can pay this loan off and your daughter can contribute (2009, 2010 Recession).
The next fall, your neighbor pays you back the money he borrowed to rebuild his house and replant the new tree, without interest. You use this to pay back the loan you took to repair your house. Your neighbor also gives you the $2 you loaned him in the beginning for the purchase of the first tree. He explains that the money you both put in to fertilize and water the old tree is a total loss, which you will both share. He says that he is free and clear and doesn’t need your help anymore (Q1.Q2 2011).
However, he cheerfully tells you that he is getting a new large screen TV for himself with the money he has made from your daughter’s loan payments. He explains that thanks to your interest free bailout, he didn’t have to dip into his retirement money or sell any of his vast fortune. He also says that as a bonus for making it through these hard times he is treating himself to a vacation to Europe (Q3 2011 Reports). Then he asks why your under-employed daughters, and her unemployed baker friends, are protesting in his front lawn (Occupy Wall Street)?
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