run on the banks

[bankrunwatch]

Over last week or so i have been following developments in the financial markets particularly in the us and uk. The collapse of the major investment banks in the us and the takeover of the third biggest high street bank in the uk seems to indicate to me that we are at the early stages of a 1929 style banking collapse. As someone who has no investments and uses the bank to pay in and withdraw funds ( i am self employed) it occurred to me that in the same way as investors need up to date market data to inform their investment decisions, depositors need up to date information if their savings are at risk of a run on the bank. With huge voliatility in the market a bank could fail very quickly - taking depositors savings with it. A website - much like a traffic watch site where members of the public post accidents and traffic jams etc - giving details of atms not working, large queues at branches could give an early indication of a run about to start. This could allow the depositor a chance to get his/her few hundred quid out before things get too chaotic. What do you think?

[moneybags]

What do you think?

I think you are panicking.

[sweeps]

I think you are panicking.

Panic is exactly what causes bank runs.

[Scanner]

It's one of those circular discussions.

I think first you have to understand how a bank works. . .your money is not there.

If it was, then the bank would go out of business (unless it charged -4% interest to store your money).

Banks work by lending money out to small businesses like you and me or large business like Microsoft and at more than the interest rate they give the depositor. That is their profit.

If they don't loan it out, they go out of business.

I think that bears repeating.

If they don't lend money, they go out of business.

As Jed Clampit said in the Beverly Hillbillies episode:

"Well, that's what banks are fer, ain't they?"

Now. . .by law, I think the Federal Reserve mandates that banks must keep at least 10% of deposits on hand. THis is to prevent the possibility I go into the bank and ask for $1,000,000 in cash they say to me, "Oh, I don't have it but we expect some loan payments tommorrow."

(that's a bad situation)

Anyway, from what I understand, that's a bank examiners job - to make sure that is happening.

What happened with a bank run is everyone shows up at once, exceeding the 10% of reserves.

I think this brings another point - if we all run on our banks today, whether it's the most stable one or it's WaMu. . .they'd all go out of business.

The money just isn't there.

So, it's about confidence - are you confident that your bank has extended credit in a responsible manner? Are they being good fidicuiaries of your money? Are you confident that if they dont' lend money in a responsible way, that hte FIDC will back you up?

Because as much as I am bullish on silver, I'll be the first to admit I have to use some bank - okay, maybe not WaMu but some bank. I can't send silver bullion over the mail to pay for a book from amazon.

Anyway, no one can predict when a run will start because it's purely psychological - it's about a loss of confidence.

It's not really a technical problem.

But you can probably figure out if your bank has acted like a chucklehead and extended credit where it shouldn't have. I am not sure where you get those figures but I imagine it's public information or perhaps available to the stockholders (buy 1 share of your bank and ask for the shareholders report, I guess).

[Scanner]

And okay, with that last lecture, I believe a promotion to Savings Advice Professor is in order.

[Scanner]

Oh, another thought to ponder about this but it is reality.

You deposit your paycheck tommorrow at any bank, pick any one, for $1000 let's say.

Almost immediatly, $900 of it is gone, for 1 to 40 years depending on the loan. (auto, farm loan, mortgage)

Only $100 of the real dollars you earned is in the safe.

Am I instilling some confidence here?

[Aleta]

I believe that checking out the banks on places like bankrate.com alerts you to the soundness of a bank.

If it makes you feel better, you might take out enough cash to have on hand to pay your bills for one month. Taking out money a little at a time isn't a big deal and the banks should be able to handle that.

[Scanner]

The share price is a tell-tale sign too. . .pretty accurate.

[Broken Arrow]

Panic and bank runs go hand-in-hand, and it's a self-fulfilling prophesy. If we think the financial world is going to collapse, we will make bank runs, and that in turn will indeed cause the banks to collapse. If we do not think the financial world is going to collapse, we'll leave our money where it is, giving the banks a chance to survive and perhaps even come out stronger than before.

This is exactly what happened to WaMu.

If you really don't want the sky to fall down you, I would:

1. Not panic.
2. Get as much of the straight facts as possible.
3. Make sound decisions based on the situation at hand, not how many people are panicking online and elsewhere.

Personally, while I agree there are cause for specific concerns, I do think this whole panic thing over the financials is over-blown. However, I'm not complaining. My recent trades are based on capitalizing on all this panic, and frankly, that's how I am able to out-perform the market right now.

[scfr]

What do you think?

I think it would be the perfect platform for banks to start false rumors in order to drive their competitors out of business.

[Broken Arrow]

Oh, another thought to ponder about this but it is reality.

You deposit your paycheck tommorrow at any bank, pick any one, for $1000 let's say.

Almost immediatly, $900 of it is gone, for 1 to 40 years depending on the loan. (auto, farm loan, mortgage)

Only $100 of the real dollars you earned is in the safe.

Am I instilling some confidence here?

That's true, but all the while, it's also generating passive income in the way of monthly payments.

Again, the problem isn't necessarily the fact that banks lend money. It's the fact that they ran out of control with poor, risky lending.

By now, that practice has mostly grounded to a halt. Now, we're just dealing with the consequences of taking on such risks....

[disneysteve]

seems to indicate to me that we are at the early stages of a 1929 style banking collapse.

a bank could fail very quickly - taking depositors savings with it.

You seem to be forgetting a major piece of the story - the FDIC.

We are nowhere near a "1929 style banking collapse" as in 1929, there was no system in place to protect customers' deposits. Now there is, and it works very well.

A bank failure does not take "depositors savings with it" since the FDIC steps in immediately to guarantee those savings. For virtually all customers, a bank failure is truly a non-event. You might be unable to access your money for a very brief period of a day or so but then it is business as usual.

[Joan.of.the.Arch]

I think bankrunwatch might be in the U.K. where the FSCS (Financial Services Compensation Scheme) insures bank deposits to an amount of £35,000

FSCS - Consumer home page - Consumer FAQs about FSCS - Deposit claims FAQs * *

My understanding from a quick skimming of that page is that a depositor may come up in the red if they had any active loans from the closed bank, because money they had on deposit may be applied to pay off such a loan upon closing. That could make things very difficult for a person.

Also important is that the their FAQ says that getting your deposit money could take up to six months, a huge difference from what USAers with failed banks have experienced:

FSCS aims to process all claims within six months. However, the time this takes depends very much on the type of claim. For example, most credit union claims can be completed within four weeks. For other types of claim it may take longer, depending on how complex it is and on some factors that may be outside of our control, such as waiting for information from third parties.

It does not seem like that slow a guarantee would do much to give confidence and prevent bankruns!

[brig2221]

It's one of those circular discussions.

I think first you have to understand how a bank works. . .your money is not there.

If it was, then the bank would go out of business (unless it charged -4% interest to store your money).

Banks work by lending money out to small businesses like you and me or large business like Microsoft and at more than the interest rate they give the depositor. That is their profit.

If they don't loan it out, they go out of business.

I think that bears repeating.

If they don't lend money, they go out of business.

As Jed Clampit said in the Beverly Hillbillies episode:

"Well, that's what banks are fer, ain't they?"

Now. . .by law, I think the Federal Reserve mandates that banks must keep at least 10% of deposits on hand. THis is to prevent the possibility I go into the bank and ask for $1,000,000 in cash they say to me, "Oh, I don't have it but we expect some loan payments tommorrow."

(that's a bad situation)

Anyway, from what I understand, that's a bank examiners job - to make sure that is happening.

What happened with a bank run is everyone shows up at once, exceeding the 10% of reserves.

I think this brings another point - if we all run on our banks today, whether it's the most stable one or it's WaMu. . .they'd all go out of business.

The money just isn't there.

So, it's about confidence - are you confident that your bank has extended credit in a responsible manner? Are they being good fidicuiaries of your money? Are you confident that if they dont' lend money in a responsible way, that hte FIDC will back you up?

Because as much as I am bullish on silver, I'll be the first to admit I have to use some bank - okay, maybe not WaMu but some bank. I can't send silver bullion over the mail to pay for a book from amazon.

Anyway, no one can predict when a run will start because it's purely psychological - it's about a loss of confidence.

It's not really a technical problem.

But you can probably figure out if your bank has acted like a chucklehead and extended credit where it shouldn't have. I am not sure where you get those figures but I imagine it's public information or perhaps available to the stockholders (buy 1 share of your bank and ask for the shareholders report, I guess).

I would agree with a lot of what you said save the part about the banks making money off of lending your deposits, which isn't true.

In our fractional reserve banking system, banks make money not by lending out our deposits at an interest rate higher than it cost the bank, but by literally creating money out of thin air, and then charging interest for it .

When you really sit down and think about it, a collapse is all but assured under the fractional reserve system, whether it be a systemic banking collapse, or others in the economy,

If 95% of all created money comes from banks, which it does, to which they charge interest for, it stands to reason that there just is not enough money supply to pay off all of the loans, something is going to give. Think about it. If I lend 10 people $10 for a total of $100, and charge an interest rate of 10%, that would mean that I should have $110 coming back to me. But how exactly do I get back $110 if there is only $100 out there that I have lent? The answer it to continously lend and create money.

Most people don't understand that for the most part, if there were no loans, there would be no money. I believe most people think we would all be exceptionally rich if we all were able to save up enough money, and then pay off all of our debts, leaving us with nothing but money.

On a smaller scale, we as individuals can do that. In the bigger picture though, if all loans were paid off, there literally would be no money!

Therein lies the problem with this credit crises. Through all of these bad loans, and repacking of bad loans, banks literally do not have the means to continue to manufacture money and inject it into our economy through loans. If no new money is injected into the economy, the game is over. This is a mathematical inevitability given the nature of today's Fractional Reserve Banking system. No one wants to believe it, and it may not happen now (I'm certainly hoping it doesn't!), but it doesn't change the fact that it will.

[Scanner]

Well, I didn't want to get into a discussion on Fiat money vs. a money with a Standard (gold or silver or even "oil dollars") but yes, you are sort of right.

But it's not the bank creating the money when it loans the money - it the Fed printing money that is backed by, well basically, being "Americans." It's decreed to be good because well, we are basically America.

Without that, it's worthless. You can't turn it in for anything physical.

So, unless the gov't decides to print money, the bank just can't loan it to you because you want $1,000,000.

I do beleive this is why I think we should return to a standard of some sort - whether it be gold, silver, or oil.

I personally think oil makes the most sense since it has vast intrinsic value and even if we stop burning it to get to work, we will need it for plastics and fertilizer for years to come.