Saturday, January 4, 2020

bank failures Essay - 1198 Words Bank Failures We have written before about the remarkable ability of banks to create money when making loans, and of their equally remarkable ability to multiply these newly created-from-nothing bank deposits via fractional reserve banking. What we have written is true, and easily verified. But banks fail! That fact is equally true, and easily verified as well. How can we reconcile these apparently contradictory facts? If banks can create, and multiply, money, how can they fail? Could your business fail if what you made was, literally, money, or what people took for money? The qualifier is important. It is what people assume about money that makes modern banking possible. The†¦show more content†¦But if his borrowed million dollars is on deposit in that bank, the liability of the bank for a million dollars remains. Most banks can probably absorb a million dollar quot;loss.quot; But if the borrower was a foreign government, and the amount created, or loaned, was a billion dollars, thats another matter. When money is loaned, it is created: instant new money, or inflation. When a loan is repaid, the money goes out of existence. Money creation, or lending, is balanced by money annihilation, or repayment. What difference does it make to the bank, then, if a borrower fails to repay? Either way, the money supply is reduced. The difference is interest, which is the banks profit. Merely adding to the money supply with each loan offers no benefit to the bank. The interest on a billion dollars is substantial, however, so to keep that interest coming, the bank will bail out a foreign government which is unable to service its loan. It may not do this directly, but through a bank consortium, or government front, such as the IMF, or World Bank. Again, appearances are important. The bank cannot be seen lending more money to a borrower who has demonstrated his inability to repay, but a group of banks, perhaps under some governmental aegis, can get away with it. You or I would do the same, probably , if we could. For example: if you could loan your brother a million dollars simply by giving him a piece of paper on which you had written ONE MILLION,Show MoreRelatedCauses of Bank Failure6382 Words   |  26 PagesWHY BANK FAILS Introduction Banks are the safest place to keep your cash. Nevertheless, bank failures happen from time to time. Here s a look at what causes bank failures and what you can do about them. The main thing to know in a bank failure is that your money is probably safe. If your money is FDIC insured, you probably don’t need to panic. 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