Telegraph’s article “Restoring the savers’ trust” (about UK bank Northern Rock huge credit problems, see below for the story) is extremely interesting to read.
Investors can make happen what they least want to happen. The viability of any bank is dependent on the confidence of the people who trust it with their money. When that confidence goes, there is a run on the bank, and the bank fails. If the contagion spreads from one bank to others, then the system itself becomes liable to collapse, with catastrophic economic consequences for everyone. That is what happened in America in 1929.
On 13 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for emergency funds due to problems in raising funds in the money market. The problems arose from difficulties banks faced over the Summer 2007 in raising funds in the money markets, caused by the subprime crisis in the United States. The bank is solvent but has a liquidity problem because a large part of the bank’s assets are held in mortgages, and are not accessible quickly.
On 14 September, the first day branches opened following the news, many customers queued outside branches to withdraw their savings (a run on the bank). It was estimated that Â£1 billion was withdrawn by customers that day, about 5% of the total bank deposits held by the Northern Rock. In one incident, police were called to the branch in Cheltenham, Gloucestershire when two joint account holders barricaded the bank manager in her office after she refused to let them withdraw Â£1 million from their account. Their money was held in an internet only account, which became inaccessible after the Northern Rock website became inaccessible due to the volume of customers trying to log on
On 17 September, as worried savers continued to flock to some Northern Rock bank branches to withdraw their savings, it was reported that an estimated Â£2 billion had been withdrawn since the bank applied to the Bank of England for emergency funds. By early afternoon in London Northern Rock’s shares, which had lost 32% on the previous Friday, fell a further 40% from 438 pence to 263 pence.
Well, to put it shortly, money does not exist, it is a social creation, it exists as long as the large majority of people think it exists. But figure out this, what will happen if tomorrow all the people in the world will go to their banks to withdraw all their money in cash? Well, it is not hard to figure, that money does not exist so it will happen something interesting, and violent for sure.
Now, do I want that most of the people realize that money don’t exist? Well, I don’t know. Maybe yes, possibly in a slow, non emotive, rational way, just like all the people in the world have enough free time to reason and discuss on how the economics system works and how it could be changed (read ripple it). But this is unlikely to happen, probably what is more likely to happen is a big crash, caused by impulsive reactions like the ones are happening about Northern Rock. It would be easy to think like Cypher (in Matrix): You know, I know this steak doesn’t exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? Ignorance is bliss.
Similarly, money doesn’t exist. But Ignorance is bliss. Lot of people prefer to remain “plugged” into the system.
I also suggest you to read the book “The Great Crash, 1929” by John Kenneth Galbraith (1954). It is an economic history of the lead-up to the Wall Street Crash of 1929. It is inspiring to read the declarations of authorities and politicians which become more and more unreal as the time passes. The worst the situation becomes, the more politicians insist on “There is no problem, everything is going well and this small second of crisis is already ended, tomorrow the economy starts to grow again, don’t be afraid”. Now of course politicians and economics authorities must say so, I would do the same if I were the chief of the central Bank or the Prime Minister but the fact we all know this means that nobody (really?) trusts their words and the more they say “there is nothing to worry about” the more people start to worry. There is an interesting comment by Stephen King (not the writer) on the Independent titled When reassuring words aren’t enough which compares the words spoken today by UK authorities and the words spoken in 1928 by US authorities. Check the differences if you wish.
Again, ripple might solve some of these problems (introducing new problems of course or shoud I say new opportunities?). Understanding how the economics (social) system works is something we all can no more postpone, I think.