With the feverish talks and increase of bank runs in the Euro-zone occurring it is my utmost duty to warn my readers of what may come to America. A lot of people are unaware of how bad things are across the pond in the European Union and how it can greatly effect our lives in the United States.
Just click on your TV set or scan the pages of your local paper and the message is loud and clear: the global economies are turning increasingly sour, what with U.S. economic data turning softer, China slowing and the Eurozone undergoing a deepening recession. In brief, it’s getting a lot scarier out there on Main Street, although you would be hard pressed to convince Wall Street of that fact, given the stock market’s vigor this year.
Part of that scare–which most Americans are unaware of–are bank runs in Europe, currently the world’s number one ulcer-producing economic arena and America’s largest trading partner. These runs, which kicked off in Greece (and have accelerated), have already spread to Portugal, Spain, Italy and Ireland to some degree. And that may not be the end of it, some financial pros suggest.
Just some of the articles trending today June 13th 2012
The Fear Of A Run On The Banks published by Deutsche Welle
Euro-zone Slow Motion Bank Run, Spain Bailout published by The Market Oracle
Avoiding the Slippery Slope toward a Bank Run published by Wharton Today
Even James Rawles of SurvivalBlog.com is warning his readers, stating “As of today, Wednesday, June 13, 2012, I strongly urge all SurvivalBlog readers to immediately draw down their checking accounts and liquidate their CDs, passbook savings accounts, and most of the their stocks to buy tangibles.”
First a little history on a bank run…
What Is A Bank Run?
A bank run (also known as a run on the bank) occurs when a large number of customers withdraw their deposits from a financial institution and either demand cash or transfer those funds into government bonds or a safer institution because they believe that financial institution is, or might become, insolvent.
As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy (or positive feedback loop) – as more people withdraw their deposits, the likelihood of default increases, thus triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy.
A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time, as people suddenly try to convert their threatened deposits into cash or try to get out of their domestic banking system altogether. A systemic banking crisis is one where all or almost all of the banking capital in a country is wiped out.
Much of the Depression’s economic damage was caused directly by bank runs. The Depression’s bank runs left a lasting mark on the American psyche, exhibited in sometimes disturbing images such as the bleak scenes in the movie It’s a Wonderful Life, where the fictional hero George Bailey struggles to keep his Building & Loan open with a crowd of customers demanding their deposits.
How could there possibly be a bank run in the United States?
According to Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke and President Barack Obama all indicate the banks are all “well capitalized”. Of course you shouldn’t worry about potential economic collapse of American banks given the prior records of these same individuals, especially Geithner and Bernanke who were in charge during the first American bank collapse in 2008 which resulted in a $750 billion bailout.
To begin assessing the probability of a “bank run” occurring in America it is necessary to understand that a bank run is merely a psychologicalevent that can be based in fact or reality, but either way involves fear, whereupon a large number of individual bank customers – “withdraw their deposits from a financial institution and either demand cash or transfer those funds into government bonds or a safer institution because they believe that financial institution is, or might become, insolvent”, according to Wikipedia.org.
Perhaps the most infamous collapses of a banking institution was that of Lehman Brothers in 2008, which was America’s largest bankruptcy in American history. Lehman Bros. at the time prior to their bankruptcy was the 4th largest investment bank in America behind Goldman, Merrill, and Morgan Stanley. This is a company that was formed in 1850 between the two Lehman brothers.
What is fascinating about the Lehman collapse is that the company survived the bank runs of the Great Depression and yet could not survive a recession in 2008? Though there are many other questions that arise from the Lehman collapse, the primary factor the firms collapse illustrates is the psychology of a bank run in which “perception” drives reality thereby creating a “self-fulfilling prophecy”.
Regardless of the bank, there is no bank on planet earth, including the US treasury, that can survive a bank run, because the cash on hand of any institution is but a small fraction of what a bank has loaned out at any one point in time. Hence, a bank may have 5 to 10 percent of the cash on hand, which in the case of a bank run quickly evaporates leaving those that are last to pull out their money without any money because the bank is broke.
For example, in the Lehman case there was no factual information regarding a deteriorating balance sheet. Instead it was rumor, which later became reality because other banks refused to engage in business with them based on the rumors. Once these events transpired Lehman’s collapse became a self-fulfilling prophecy that was unstoppable once investors began liquidating accounts.
It’s significant to remember that once the Lehman Brothers rumors began, then it was only natural for other companies to become trapped in the same vortex. Companies such as Bear Sterns and Merrill Lynch were ensnared in the vortex of fear and uncertainty as Lehman, however the government bailed out Bear Stearns whilst choosing not to bail out Lehman.
Of course there were financial rationales made by then Treasury Secretary Hank Paulson, who was the former CEO of Goldman Sachs to which Lehman was the Goldman’s primary competitor, that were made predicated on financial irrationality. Though these issues are valid topics of discussion, they are best left to another time.
The essential point to grasp from the Lehman’s collapse was the collateral damage caused to other banks once fear and panic set into the psychology of the investors and bank customers. And keep in mind now that such an “effect” is magnified many times over due to the expansion of systemic risk posed by commercial banking institutions like Bank of America which now owns Merrill Lynch investment bank.
Also imperative in understanding the future risk of European bank runs on America is to remember that the U.S. taxpayer sponsored $750 billion dollar TARP bailout resulted partially in the transfer payments from U.S. banks to European banks in an effort to minimize the global collateral damage suffered by European banks. I can assure all Americans that there will be no similar reciprocity offered to America from the Europeans.
So, How Do You Survive & Protect Your Family From A Bank Run (Run On The Banks)?
Remember a bank run occurs when people lose confidence in their bank and quickly try to remove their funds. In the past, this was done primarily by literally going to the bank and withdrawing money. Most of us have a mental picture from the 1930′s, of a line of people in front of a bank.
Bank runs like that don’t usually happen anymore, but there was one in 2007 when Northern Rock collapsed. A couple of hours later, the UK government said it would back all the deposits, and the run was effectively over. In general, these days, you and I will never hear about them until they are over. Money moves much faster over the internet.
So do not wait to see if your bank lines get longer when depositing your weekly payroll check, you must diversify your risks now.
1. Diversify Bank Accounts – If you must use banks to hold a majority of your monetary assets please split them among 3 to 5 safe banks. Safe banks are banks that have not expanded aggressively between 2002 and 2005, expanded loan portfolios and offered higher than average CD yields.
Try to stick with local credit unions as well.
2. Cash On Hand – Storing cash in your home or business can be risky but having the green backs close at hand can keep you and your family alive when others cannot withdraw money from a financial institution due to bank runs.
You can use this fiat currency to purchase last minute preps you and your family need to weather out the storm.
3. Physical Assets - The problem with cash, even if it’s in a safe in your own house, is that it can be devalued right before your eyes.
But with physical assets such as precious metals (gold, silver, copper, etc.), land, food, family garden, etc., it is very rare that when bank runs occur that they will be devalued. As a matter of fact you may gain some great return on investment by holding physical assets during a financial crisis that results from a bank run.
In America’s modern economy, the idea you could lose your money in a bank failure seems farfetched. The fact is, thousands of banks are about to fail and the FDIC’s deposit insurance fund is showing a deficit. Besides, banks pay almost no interest right now, so apart from the convenience of a small checking account balance, what’s the point in keeping your money in the banking system? There isn’t one.