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Why Banks & Governments Hate Cash: Bank Runs
Why Banks & Governments Hate Cash: Bank Runs
The photos from Greece showing long lines at ATMs are astonishing. Even after the deposit outflows from Greek banks over the past weeks, there are still large numbers of people who are trying to get their money out of the banking system. With the banks closed, ATMs are the only way for people to get any cash. Let’s not beat around the bush in describing what is happening: this is a bank run. Even though Greece has a deposit insurance scheme that covers up to €100,000 in savings accounts, trust in the banking sector is declining and people are trying to get their money out. Cash is the ultimate means by which consumers can restrain the behavior of governments and banks, which is why governments and banks are doing everything they can to do away with cash.
The problem with the banking system is that banks today operate as fractional reserve banks. Money deposited into savings accounts is loaned out up to the bank’s reserve requirement. If the reserve requirement is 10%, then 90% of the money in savings accounts is loaned out. If the reserve requirement is 3%, then 97% of the money in savings accounts is loaned out. The problem comes about in that the bank simultaneously gives the full use of that money to borrowers, often lending at long terms up to 30 years in the case of mortgages, while still telling depositors that they can withdraw their money at any time. So what happens when depositors want to withdraw more money than the bank has on reserve? The bank tries to refuse to honor withdrawal requests. Then the public loses confidence in the bank, depositors line up to demand their money, and you have a scene out of “It’s a Wonderful Life.”
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Why Keynesian voodoo doesn’t work?
Keynesian policy of manipulating economic “aggregates” through countercyclical macro-measures appeared to work when balance sheets was not stretched to the brink. As we wrote in “Goebbelnomics”
“If collective exuberance and apathy is the sole cause of the business cycle, then it logically follows that human emotions need to be manipulated accordingly. Only by doing so can policymakers smooth out the ups and downs in economic activity. And what better way to do that then to change the money supplied to the general public.”
While people called this the “most sickening article ever written” it is unfortunately what economics has come down to. Through fractional reserve banking and a central bank freed from the shackles of a barbarous relic, the money supply can be expanded without limit…or at least as long as the greater populace voluntarily will leverage up their balance sheet to buy stuff and simultaneously agree to their own servitude. Nothing more than collective manipulation on a scale that would make Goebbels himself envious.
The glaringly obvious result of such policies, gross capital consumption through malinvestments epitomized through a serial bubble economy, did not discourage our money masters. The best and brightest even suggest bubbles are the only remedy to what they believe is some sort of secular stagnation.
Just as drugs, the abuser must increase the dosage to feel the same high and spend accordingly.
However, as the first chart shows, the current recovery, albeit one of the longest on record, has also been the weakest.
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A Portrait of the Classical Gold Standard
A Portrait of the Classical Gold Standard
“The world that disappeared in 1914 appeared, in retrospect, something like our picture of Paradise,” wrote the economist Cecil Hirsch in his June 1934 review of R.W. Hawtrey’s classic, The Art of Central Banking (1933). Hirsch bemoaned the loss of the far-sighted restraint that had once prevailed among the “bankers’ banks” of the West, concluding that modern times “had failed to attain the standard of wisdom and foresight that prevailed in the 19th century.”
That wisdom and foresight was once upon a time institutionalized throughout an international monetary culture — gold-based, wary of credit, and contemptuous of debt, public or private. This world included central banks including the Bank of England, the Bank of France, the Swiss National Bank, the early Federal Reserve, the Imperial Bank of Austria-Hungary, and the German Reichsbank. But the entrenched hard-money ideology of the time restrained all of them. The Bank of Russia, for example, which once required 50 percent to 100 percent gold backing of all notes issued, possessed the second largest gold reserves on the planet at the turn of the twentieth century.
“The countries that were tied together in the gold standard system represented to a not inconsiderable degree a community of interest in and responsibility for the maintenance of economic and financial stability throughout the world,” recounted Aldoph C. Miller, member of the Federal Reserve Board from 1914 to 1936, in The Proceedings of the Academy of Political Science, in May 1936. “The gold standard was the one outstanding symbol of unity and economic solidarity which the nineteenth century world had developed.”
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Australian Banks Seen Needing $25 Billion in Capital – Bloomberg
Australian Banks Seen Needing $25 Billion in Capital – Bloomberg.
Commonwealth Bank of Australia and its three main competitors may need as much as A$30 billion ($25 billion) after a government-commissioned inquiry called for “unquestionably strong” capital levels, analysts said.
The shortfall is based on lenders needing to boost levels to within the top quartile of their global peers and set aside additional funds against potential losses on home mortgages, as recommended by the Financial System Inquiry report released yesterday in Sydney by Treasurer Joe Hockey.
Australia’s major lenders hold about 10 percent to 11.6 percent of their assets as Tier 1 capital compared with at least 12.2 percent at the world’s safest banks, the government’s first inquiry into the financial system since 1997 said. Banks should be strong enough to withstand shocks, particularly given their reliance on overseas investors for funding, the report said.
“The onus on capital is in line with global changes and Australia has to fall in line,” John Buonaccorsi, a Sydney-based analyst at CIMB Group Holdings Bhd. said in a phone interview after the report was released. “I don’t expect a straight capital raising yet.”
Australia’s largest banks are initially more likely to resort to dividend reinvestment plans, where investors swap all or part of their dividend for new shares, and limiting increases in payout ratios, he added.
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