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September 15, 2007

Banking panic ....

What get's into people's heads? Or perhaps I should ask what is it that the media think they are doing when they sow panic in people's minds. The Banks borrowing money from each other and from the Bank of England is nothing new, they do it all the time. Yet, looking at the headlines in the papers over the last couple of days you could be forgiven for thinking that the bank at the heart of all this fuss was about to go belly up and take everyone's money with it. What nonsense - and more fool the idiots rushing down to the local branch and demanding their money back.

Anyone with any knowledge and a half ounce of common sense knows that NO bank EVER has all the money on it's books in it's vaults. Certainly not since the end of the 19th Century anyway. Read the small print on the bank notes in your wallet - it's a "promissory note". In other words it "represents" money, and its only value is the issuing bank's assets. Originally this was gold bullion, held in a reserve stock by the bank. Each "Issuing Bank" had to keep a certain percentage of it's circulating "Bankers Notes" available in bullion in case someone wanted "real" money. That standard vanished forever in the 1930's with the "Gold Standard" and now the "value" of any country's currency is made up of a mixed bag of "goods" which represent the nation's trading assets and reserves. Very little of the currency actually in circulation is backed by "hard" assets such as real bullion, most of it is in "intangibles".

The banking system is now run on a system which allows the bank to take a one hundred pound deposit from one customer and "lend" eighty to another customer. That customer deposits the borrowed eighty and they then lend another sixty five to the next customer and so on. This keeps the money working and in circulation. The first customer gets his five percent interest on his deposit and the borrowers are paying seven percent (or more!)interest to the bank, so the bank makes a profit and the actual hundred pounds is behaving as if it were two hundred or more. Everyone is happy - until there is a hiccough in the cash flows. Then the original bank borrows money from their neighbour or the Central Bank (In our case the Bank of England) and keeps the money flow going. The original depositor hasn't "lost" his money and won't, because the bank covers itself with insurance and under guarantees is obliged to ensure that depositors cash is kept safe.

But evidently the idiots running up and down High Streets grabbing money out of Northern Rock and shoving it into other banks or stashing it under their mattresses haven't figured out that if anything is likely to cause them to lose their deposits - it's themselves and their behaviour in stripping money out of the bank!

This is one of those cases where the media has triggered a panic by their sensationalist reporting. The Northern Rock was never in danger of "going under" and probably still isn't. But there is no doubt at all that the damage that has been done in this "run" on their liquid assets (money) will hit their reputation and their business extremely hard. Come to that, they, or their insurers, would probably do well to issue a few writs for damages against the more sensationalist headline writing rags. It might just shake our media out of its shock/horror sensationalist attitude and bring them back to earth and reality.

In the meantime, if you have money to invest, I suggest you rush round to the Northern Rock and negotiate an over the average interest rate for your deposit. You'll probably be welcomed and given whatever you ask for!

Posted by The Gray Monk at September 15, 2007 03:56 PM

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In Milady's hometown, the vetinarian's daughter wanted to be an intern (i.e. unpaid help) at the local bank between high school and college. The hometown bank had new management who didn't realize that you have to keep the locals happy, and they told him no. So he asked for all of his money on deposit in cash, all $3 million or so.

I think the old man who owned the bank finally got him calmed down, but he almost forced the bank into receivership by draining its on-hand cash. US Federal Reserve rules are very strict about that kind of thing.

Posted by: Kentucky Packrat at September 15, 2007 05:07 PM

Ouch, that really can hurt. In this case the bank is a national institution and our banking laws are quite strict when it comes to protecting the depositors money so there is almost no risk, but our media have hyped the whole thing to such an extent that you would imagine the entire banking system is about to collapse.

Posted by: The Gray Monk at September 15, 2007 10:11 PM