December 23, 2010

Bank Run Stop - Politicians Make Me Pop

Some startling piece of legislation is in the works over here in Holland. Dutch ministers of the Finance and Justice departments, Opstelten and de Jager, are working on a new law that prohibits people from publicly calling for a 'bank run,' should they do so they can be fined (to a maximum of €19.000) or imprisoned (up to 4 years). The ministers argue that calling for a bank run can lead to situations that can't be controlled. The legislation is also aimed at public figures who have authority in the financial world. The main aim, according to the ministers, is to provide stability and a climate of trust for the banks.

Not strange in itself of course since a bank run equals bankruptcy, yet what is so woefully missing and what politicians conveniently leave out is why a bank is so vulnerable in the first place when a lot of people withdraw their cash. And the answer is very simple; they basically don't have that money. Banks are required to have 8% of their total amount of money in house, the rest is lend out. That means that when that amount of 8% is exceeded they are basically broke.

Most people know what the fallout of a bank run is. The money somehow simply evaporates, unless of course when the government steps in rescuing the bank with taxpayer money like we've seen a number of times during the credit crisis of 2008. What's even more startling is this; the banks didn't have the money to begin with because most of the banks credit is created out of thin air because of fractional reserve banking. Banks can create money out of nothing, they do lend money from central banks (at interest) but are free to create additional money should the need arise.

This is what really ticks me off. Banks have an enormous advantage, they create a great deal money from nothing, loan that money to costumers. The customer is hold fully accountable, no payments (on time) means loss of property. Here's a fair question in my opinion; does it work the other way around?
I don't think it does. Bank runs show that even the rumor of a financial institution failing will actually cause it to fail. How stable are banks really to begin with? What recent history has shown is that when banks fail the taxpayer gets the bill. Even in my own country, Holland, banks were bailed out with €35 billion in taxpayer money. Today it was abundantly clear once more that even our own politicians rather work with a bandaid and forbid people to use the word bank run in public instead of addressing the root causes of a bank's inherent instability, but seeing how many former politicians wind up as CEO's of banks I'm not that surprised.

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