Fractional Banking System
"A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system."
"A situation in which numerous bank customers try to withdraw their bank deposits simultaneously and the bank's reserves are not sufficient to cover the withdrawals. Bank runs are a result of panic"
To say the markets and the Economy at large is in a state of panic would be a huge understatement at best. The LIBOR or the rate at which banks lend to each other on overnight and longer term loans has increased as distrust has spread within the Financial sector. Banks are basically afraid to lend to each other and thus increases liquidity problems for the everyone. Banks are hoarding cash and not lending to each other or consumers. This is having a serious consequence for Economies where cash flow grinds to a halt and tips many businesses over the edge as financing is no longer available. The resultant set of dominos falling are increased layoffs, further share price deterioration, devaluation of the stock market,reduced tax base and an increased welfare bill for Government. Are you starting to panic yet ? Feel like withdrawing your savings and stashing them under your bed ?
So we have a situation right now where Governments are running to Guarantee Bank deposits.. Ireland said it would guarantee them up to a value of 400 Billion Euros, I began to wonder..Well Prime Minister Brian Cowen, where are you going to find a sum like this in Ireland ? Has he seen the pot of gold over the rainbow or has he totally lost his faculties ?
Taking Ireland as an example, as it's where I lived most of my life before moving to France, to see what kind of numbers we are talking about..
2008 Total estimated Tax revenue for 2008: 48.9 Billion Euros
2008 Total estimated non Tax revenue for 2008: 684 Million
2008 Total estimated Revenue: 49.594 Billion Euros
2008 Irish Exchequer Balance: -4.8 Billion Euros
So Brian, where does the 400 Billion come from ? The country already has a net negative balance of 4.8 billion euros.
This is Deposit guarantee scheme in Microcosm and the same situation can be said for other countries as well. The announcement is meant to "Shore up confidence" in the banking system. Sorry the banking system got themselves and the rest of us IN this mess because of highly imaginative accounting practices and the above seems from the same mold to me.
The reality of the situation is that Investors ARE panicking right now. The UK branch of the Icelandic bank Landsbanki, Icesave, an Internet based subsidiary, had to freeze withdrawals from customers on Tuesday. From a fractional banking standpoint, this chicken came home to roost with a reality check. There will be many more of these instances as this drama unfolds which has already claimed so many victims.
Poor Iceland went from being a mini consumerist America to a third world fishing village in the pace of a week. In this we have the world in Microcosm. With a poplulation of just under 400,000 they went to the wall a lot faster. Sheer momentum is at play with the larger economies.
Another shoe on the way down..
Adjustable rate mortgages are being reset very soon which will see millions of homeowners around the world who are on the brink of going broke actually go broke and default on their mortgages. Another addition to the housing inventory and another addition to the Food Stamp Q and unemploymets line, all of which means less money and more government debt.
There comes a time when , even Politicians and stockbrokers have to face the music. Money does not grow on trees, it requires people who have jobs, pay taxes, buy houses, groceries, cars etc etc.. Once you take the rug out from under a functioning economy it just keels over ..how hard we wait and see.