All economies, even ours, are vulnerable to bank runs, like what we’re seeing in Greece. It’s a bugger, but a small price to pay for what we’ve achieved.
“I thought somebody should do something about that. And then I realised, I was somebody.” – Lily Tomlin
“I thought Greece needs an economic miracle. And then I realised, I am an economic miracle.” – Jon Giaan.
I’m off to save Greece. I can’t sit idly by any longer. I’ve packed the cape and the star-spangled undies and I’m off to the rescue.
… and I’m going to squeeze in a little tour of the Greek islands as well. You know me. I’m all about work/life balance. And peace, justice and ouzo are not mutually exclusive.
Right now I’m trying to figure out how much cash to take with me… Because at the moment, the Greek government is fighting off a run on the banks, and the ATMs are in lock down.
You’re only allowed to withdraw 60 euro a day.
60-euro? Please, I spend that much on refresher mints.
Bank runs used to be much more common. We’ve never had to deal with a genuine bank run, but the threat has never completely gone away. It’s still the Achilles heel of the banking sector.
Because the banks’ business model is effectively to create money out of nothing.
Say I have $1 and I give it to the bank. They stick a small percentage aside – as a reserve, then lend the rest out. Eventually that money gets spent, and someone puts it back in the banking system. The banks put a fraction aside and lend the rest out.
And round and round it goes.
A run on a bank occurs when everyone tries to pull out all of their money all at once. Because all of that money literally does not exist. The bank probably only has like 10% of total deposits to hand. If everyone makes a claim, the best they could do is pay out ten percent.
And an institution that can’t pay their debts is bankrupt. The bank goes bankrupt.
And you’ve lost all of your money.
And when I say ‘your’ that’s not really true. Because it stops being your money once you put it in a bank.
Effectively, you’re lending your money to the bank. It becomes their money then, and you become one of its creditors.
(Probably one of its least important creditors.)
And so even with deposits in a bank, there is a degree of credit risk. If the bank goes under, you could lose all the money you lent / deposited.
It’s a total horror story.
And so Greece has put limits on how much money you can take out. At the end of the financial year the government defaulted on a €1.5-billion loan from the IMF. Now, who knows what’s going to happen.
The Greek banks are exposed. They’re sitting naked on a rock. And the Greek people are nervous. They want to get their money out before the whole show collapses. But everyone’s thinking that, and so collapse becomes a self-fulfilling prophesy.
The best you can do is stem the bleeding with withdrawal limits, and hope confidence returns in time.
Will it work?
Jon to the rescue.
And is the system broken? It might be tempting to say that we shouldn’t let banks create money out of nothing, and I could think that maybe there’s an argument that leaving such a crucial task to a notoriously greedy cabal of powerful interests is a bad idea, but an economy without credit creation?
That’s a pretty radical idea.
Think about it this way.
Right now, the total value of hard currency (actual notes and coins) in the Australian economy is a mere 0.3 billion.
And what’s the total money supply – once you factor in the money the banks have in deposits?
So we’ve effectively got a mammoth money system of $90 billion, delicately balanced on a foundation of just half a billion.
And so if you took credit creation away from the banks? You’re looking at a 99.5% reduction in the money supply. We get freaked out about a 1% fall in GDP. What’s 99.5% going to look like.
The point is that yes, credit creation creates the potential for instability – for bank runs and for things to go pear shaped.
But as a system, look at what it’s created. Poverty-related diseases are all but eradicated. Poverty itself is a lot more comfortable than it used to be. And in the first world, no one need ever go hungry.
We shouldn’t underestimate what an achievement that is – to elevate an entire civilisation out of scrounging for base survival. And then to do that by harnessing the power of our own selfish and greedy motivations..? genius.
The beauty of is all is breath-taking isn’t it? Truly wonderful.
Of course there are problems. I live in the real world. But I also think that we, as clever humans, should take the time to recognise what we’ve accomplished.
And the wheels will keep falling off from time to time. In Greece the wheels are coming off just as they go over a cliff. It looks like it’s going to get worse before it gets better. That sucks.
But hopefully lessons will be learned, we’ll build some bug-fixes, and come up with a better system.
Western civilisation marches on.
Have I got my head in the clouds? Too many pinna coladas? Does the economy look beautiful to you?