I started this thread to try to explain to the common person that is not well educated in financial systems, how the financial crisis starts, how it
effects them and their savings and why more collapses inevitably will occur in the future. A financial guide for dummies if you will.
Why does only take an unusually long line of people in front of the ATM machine to get a bank manager nervous?
Because the ingenious invention that we call money is based on a fancy promise that can never be fullfilled.
"Is it real money or bank money?"
The question isn't as stupid as it seems
It is a difference between money and money.
Firstly, there is the money that is becoming increasingly more rare: banknotes and coins.
If you have in your possesion a hundred dollar bill, you can be reasonably sure that it is worth just a hundred dollars.
The threat to the cash-huggers consists mainly in the risk of being robbed, or that rampant inflation quickly erodes purchasing power.
Money in a bank account? It's a whole different story. Digital money can turn out to be worth exactly nothing.
To understand why, we must step back a few centuries to the birth of the modern banking system.
The first bankers were goldsmiths who began to hold gold for their clients.
They received a receipt that could be used to retrieve the gold when it was needed.
Someone soon found out that it was easier to start using vouchers as payment than to run back and forth to the smith as soon as they needed their
The smiths, in turn, realized that they could write many more receipts than is actually covered by the amount of gold they had in their possession.
They had observed an interesting phenomenon: only a fraction of all receipt holders showed up at once to get their gold.
This model is still the foundation of all banking operations!
As long as nobody is questioning how the system works, it's fantastic.
Banks may lend money on a large scale while savers do not have to carry around cash and (at best) gets some interest in the money they keep at the
The problem is that everything is fundamentally based on an empty promise.
All it takes is enough customers to simultaneosly ask the forbidden question: "Can I get my money?" to collapse any bank.
A seemingly safe hundred dollar bill, can after depositing it into a bank, suddenly be as worthless as the flimsy paper it's printed on..
Not surprisingly, banking crises in history have been as common as colds.
1933, after yet another devastating wave of financial collapse, it was decided in the U.S. that the government would step in if a bank went bust, and
ensure that ordinary investors got their money back, at least up to a certain amount.
This promise was a reason that the number of bank failures declined in the following years.
The problem for the banks was that the state in order to help ordinary people, regulated the banks through new laws, which made it harder for them to
One way to get around the laws were so-called money market funds, which were seen as just as safe as a bank account, but gave a higher interest rate.
They quickly became popular, especially among institutions and companies who need to deposit large sums of cash.
Money market funds was the beginning of what came to swell to a huge and complex financial ecosystem outside the regulated banks.
These so-called shadow banking systems grew in size, to at most a staggering 20 000 billion dollars in early 2008, more money than was found in the
whole of the traditional banking system.
Gary Gorton, a professor at Yale University in the United States, has described how the financial crisis that began in 2007 is very similar to the
early 1900's bank jams.
What triggered the credit frenzy after the Lehman Brothers collapse was not the fact that other banks were hit, but that one of the largest U.S. money
market funds were forced to take a big loss.
One hundred dollar bill that was thought of as a safe and stable bill, was no longer worth a hundred dollars.
In order to avoid a total meltdown, the U.S. government was forced via the Federal Reserve, to step in and balance up the shadow banks.
A few years later, the fundamental weakness of the system are not gone.
In autumn 2011, when the crisis traveled all the way from banks to governments and back to the banks again, the situation became acute again.
Several banks in Europe was threatened by massive outflows of money.
Large companies like GlaxoSmithKline and Vodafone emptied their accounts in large banks on a daily basis. They simply could not be sure that the money
was still there the next morning.
Only thanks to the European Central Bank (ECB's) emergency loan of 1 000 billion euros, a bank panic was avoided.
But rather than start lending to each other again, many banks chose to deposit their money in the only safe place that remains: an account with the
If there is something a bank manager understands, it is precisely the difference between money and money.
And as long as it's that way, financial crises will continue to succeed one another.
The financial system as we know it, was never ment to be a safe system for ordinary savers.
It was ment to be a system that allowed banks to use more money to lend out then they actually had in their possession (and thus making more
edit on 3/6/12 by Tollon because: Spelling corrections
edit on 3/6/12 by Tollon because: (no reason given)