Thursday, September 25, 2008

Polgate: Wallia’s Toothpaste Squeeze

Polgate toothpaste was critical in the fictitious country of Wallia. Wallians prized their white teeth and fresh breath. Their government recognized toothpaste’s critical role in dental health, creating programs to support its availability.

Decades ago, a huge Polgate shortage resulted in needless carries and stained incisors. To prevent future tragedies, Wallia established the central toothpaste repository, since renamed the strategic toothpaste reserve. There, a six month supply of Polgate is stored, in case of disruptions.

Managerial talent worked tirelessly to make this critical product cheaper, thus more available to the general public. It did so by moving Polgate production to Subprimor, a low cost manufacturing region within Wallia. Subprimorians were notoriously poor and grateful for the minimum wage. As most lost their teeth at an early age, employee pilfering was low and dental insurance unnecessary.

Subprimorian managers played the same substitution game as their greater Wallian counterparts. They used cheap ingredients rather than lower cost labor. Substitution worked its way down the Polgate supply chain, until most of a tube’s ingredients were not as labeled. Some were dangerous, even more so when mixed together under compression. When the right ingredients joined in sufficient levels in a tube, ka-boom! The container exploded, causing an intense chemical fire.

Wallia households purchased the Subprimorian produced Polgate, unaware of its explosive potential. As the strategic toothpaste reserve got low, new potentially combustible supplies were added.

In this unusual nation everyone rented their home from any one of five huge housing corporations. As time passed, seemingly random house fires occurred throughout Wallia. They could be traced to bathrooms, but otherwise fire marshals had no clue as to their cause.

Home insurance rates soared due to the high risk. For insurers, the chance of fire had grown too great. Costs needed to be passed on. The price for a year's coverage reached 10% of the home's value.

At that rate, a house could be replaced three times over the property’s 30 years depreciation schedule. The housing corporations would not pay for coverage. They went bare. When a tube ignited, they took a double hit. They lost the rental stream and the full value of the home. The disruptions hit congregate housing complexes, Happy May and Heidi Sue, particularly hard.

It took a long time to track Polgate as the root cause of the fires. By then, the government realized portions of its toothpaste repository were tainted. It could not tell the public the truth. That might cause a run on the good parts of the strategic toothpaste reserve.

So Wallia did the only thing that made sense. It nationalized the toothpaste industry and purchased the bad Polgate from retailers. The government asked retailers to submit the bad product in an orderly fashion. Retailers could conduct Polgate recalls if they wished, but were under strict instructions to minimize any danger to the public.

The Wallian government planned to have two toothpaste reserves, one of high quality, the other of the explosive kind. One polished molars, the other erupted in a literal fire sale.

The problem came in determining which was which. For that they hired experts from Subprimor’s toothpaste industry, employing the people who substituted the dangerous ingredients. After all, they best knew the toxic, flammable components in the product.

The Wallian government stressed, with the bad Polgate gone, the free market could provide good toothpaste and continue protecting dental health. Homeowner’s insurance could decrease once again to an affordable level for the huge housing conglomerates (who would be reimbursed by the government for their fire losses).

Best of all, people’s teeth could remain white and their breath fresh. Does this make sense to you in any way shape or form?

The intent of this story is to highlight some of the relationships in our current financial crisis.

Toothpaste = credit, the ubiquitous product that furthers the common good
Toothpaste makers & dangerous substitutions = one face of Wall Street investment houses, the packaging and selling of junk credit products
Homeowners Insurance = method of covering risk, analogous to unregulated credit derivatives, credit default swaps, which became overpriced due to risk intolerance & speculation
Housing Corporations = another face of Wall Street investment houses, trying to cover risks from bad products
Strategic Toothpaste Reserve = Federal Reserve & Treasury

No comments: