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bank systemic contagion

 

 

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bank systemic contagion GDP 1: gross domestic product
first and second round effects of external prices rises on inflation
useful essay by laffer on supply-side economics

the mechanics of inflation : The great government swindle and how it works

the sum of a geometric sequence: or the arithmetic of fractional banking
on stimulus spending and multipliers

it still seems many don’t follow why ‘the system’ is fearful of ‘systemic’ break down - and how the fed acts

Banks effectively loan approximately ten times the amount of money that they take in. [This is known as fractional banking.] They do this on the assumption (statistically based) that not everyone will try to take out their money at one and the same time.

There are still some who either do not believe this, or do not get it.

A ‘run on a bank’ is when ‘too many’ customers / lenders / creditors try to take their money out at once.

The Fed [Federal Reserve Bank - the US central bank] stands by to print/issue more money to pay off the panicking customers, until the panic subsides and the panickers start putting their money back into banks. Most money is already sitting in bank accounts of one sort or another. For instance, you borrow on a house. The seller then tends to bank the amount, or most of the amount, that you paid. You may also buy a new telly, which money then rapidly goes into the retailer’s bank. But if y’all kept the money out of the banks, they would not have any money to work with.

Banks also borrow and lend among themselves in very large numbers. Many of the banks are getting very wary of lending to other banks. Many of those banks have margin calls, or customers who may suddenly ask for their deposits back. So, they want to keep a cushion. They do not want to run out of the other people’s money they are lending around. They don’t want to get caught with their nikkers down unable to pay out more than they have at the demand window.

As the banks lend among themselves, if a run the bank does drain their reserves, then other banks can be at risk of not receiving money owed to them by the failing bank. The fear is that many banks can then go down like a series of dominoes, the problem worsening at each step. This is known as systemic contagion.

Modern central banking is designed to head off this sort of contagion. This is why the system was put in place after the chaos of the Great Depression of the 1930s. Unfortunately, too many people are still teaching and thinking in terms of the conditions prior to the Great Depression, and the widespread introduction of fiat currencies with government monopoly control of that fiat money. It is important to remember that money in the modern state is heavily politicised.

When a bank’s cushion gets close to the wind, they would rather no-one caught on, hence the protests of innocence. Meanwhile, the vultures circle looking for victims.

It’s like a poker player who is running low on chips, but doesn’t want the others know. Let’s see if we can embarrass Bear Stearns, and we get more market share, and may even get their whole casino on the cheap to add to our own empire. This would help our economies of scale - we just need a bit of enhanced computer power and we sure don’t need all this staff!

The Fed injections are greasing the system. This is not equivalent to inflation.

Sanely, as the problems attenuate, the money will be withdrawn again from the system. In the case of inflation, that money will not be withdrawn.

related material
on inflation in the uk, and its management
how a mortgage lender works, with reference to northern crock

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bank systemic contagion
first and second round effects of external prices rises on inflation
useful essay by laffer on supply-side economics

the mechanics of inflation : The great government swindle and how it works

the sum of a geometric sequence: or the arithmetic of fractional banking
on stimulus spending and multipliers

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the address for this document is http://www.abelard.org/economics/bank_systemic_contagion.php

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