Been away for a while - something for Mr. Decker.......greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Perhaps Mr. Decker can worm his way out of this one.
"Y2K: SHUT-DOWN OF THE BANKING SYSTEM"
"With only months remaining before D-Day arrives, the critical issue must be raised; when and how will the banking system be paralyzed as a result of Y2K? Take note how the previous was worded. The question is not "if," or "maybe," but when. Indeed this seems to be the easiest Y2K event to predict: the shut down of the banking system.
At some point later this year we should see a situation were demand for currency will significantly exceed supply. Our economy operates under a means of payment called a fractional reserve banking system. Whenever a deposit is made, almost all of it is lent out to a borrower as a loan that is turn paid back in installment payments over a period of time. The depositor is then told a lie; that he can get all his money out anytime on demand.
Reserve requirements in the U.S. today are around 6-12%. On the surface this may seem like a comfortable range for normal banking operations-and it is! But wait. In reality actual cash reserves sitting in vaults and spare currency in Federal Reserve holdings is much lower. These numbers are between 1.5-2.75% of total deposit obligations. Therefore the system relies universal public and depositor confidence and faith they will have access to their savings, as it would take a mere 5% (or less) to deplete all reserves.
When banks fail, the FDIC steps in and cover a failing account for up to $100,000. However, it cannot at any one time bail-out large numbers of banks simultaneously. This is because it only holds approximately 1.5% in total deposit obligations. As a result, the FDIC can realistically insure a very small minority if a serious financial crisis were to emerge.
So how then can we be so sure our financial system will be in crisis within the coming year? The global financial network has been heavily computerized in recent times. Most of these computers by their very design have the Y2K bug built in. If the system is to remain intact, virtually all computers in this interdependent wire system must be repaired or near full compliance. Anything less than 99% accuracy in routine calculations in this digitized network creates debilitating, cumulative errors that eventually overwhelm-then halt the flow and processing of data. This is the problem of imported data between interfaces and can be likened to the way a virus can propagate.
There comes a time when propagation of bugs in the system become so pervasive that the flow of money/funds/data no longer be processed, as the time expended to hand check for corrupted data exceeds the capacity and ability to do so in a manual fashion. There is no way other than computers to efficiently handle this many transactions.
The velocity of money would be drastically reduced-if not halted. The modern division of labor would collapse without this constant transfer of information to occur. This means that even if 70, or 80, or even 90% of U.S. banks managed to get 100% compliant before 2000, the seeming minority who fail would mess up the compliance of the whole system.
That being said, we have a legitimate concern that ATM's and other transactions will suffer severe disruptions in the weeks and months following Jan 1,2000. This would necessitate the prudent action of withdrawing (or refusing to deposit) a "month or two" of cash from the bank. At least that is what any reasonable person would conclude.
There are 103, 000,000 households in the U.S. The average monthly earnings are around $3,000 per head of household. For the sake of argument let's conservative and say that the average worker (139 million) will have $1,000 cash on hand (which takes into account the fact that some have none and some have much more) This would be $139 billion. Let's say that households take out an average of 15% of their bank accounts to be safe. This would be another $50 billion. Now let's say that 25% of small businesses plan to have two weeks cash to ensure payroll for employees. That's another $31 billion. Let's say that businesses, out of concern for their investments, withdraw an average of 5% of their deposits (Business deposits total $3.1 trillion). That's another $155 billion.
Now let's add it all up. $ 139 Billion
+$ 50 Billion
+$ 31 Billion
+$ 155 Billion
A Total of $ 375 billion in cash will be demanded.
This doesn't sound too bad does it? What if these numbers are doubled? $ 750 billion. So this begs the question: Is there enough currency to meet this demand? Fact: Existing bank reserves are 49.4 billion. The Federal reserve has promised to have an extra $200 billion specifically for Y2K. Adding these two figures we have a total of $249 billion that the banks will have available. This would not only drain ALL reserves, but banks would be short -$125 billion!!-There would be no more cash left.
But wait, it gets worse. The above are based on very reasonable assumptions and disregards real-life. If such a small amount of withdraws could cause wreak so much havoc, what will be the general public's reaction when the panic begins? At some point in the midst of a crisis, infamously known as a bank run, sentiment will change in a dramatic fashion. As the lines get longer it becomes "Give me it all please."
Recall the 5% rule: the approximate percentage of depositors required to shut down the financial system if they were to behave in this manner. There have been many recent polls indicating something quite alarming. The percentage polled who intend to withdraw ALL of their cash before 2000 ranges from 16-31%. Those who say "most" is even higher at 30-47%.
From these numbers it can be concluded that there will indeed be a popint only months away when a freeze on the bank accounts takes place. What is as yet unclear is the precise date it will occur, or the manner in which it is executed.
Presumably bankers and those in authority know the day of reckoning is quickly approaching and they are shaking in their boots.There is currently a well-orchestrated anti-bank run campaign underway, but this may only succeed in forestalling the inevitable.
Such efforts typically involve attempts to downplay the magnitude of Y2K or give happy-spinned reports about how well they're working on it. They will publicly compare Y2K to a storm that lasts a couple days. Anyone who says anything more than this status quo will be labeled an "enemy of the people" or a "doomsayer," etc. This is part of the ongoing blame-game directed at those seeking the truth to which the author un-apologetically attempts to do.
In the case of the fractional reserve banking system a lie has been told for too long. A lie that must now be painfully revealed."
The above from Gold Eagle.
And I haven't even mentioned the coup de grace, imported data.
-- Andy (2000EOD@prodigy.net), April 01, 1999
Andy --- welcome back! There you go scaring people again with unfounded possibilities. The banks are already compliant, doncha know? The Feds are ready. Y2K problems are a fantasy promulgated by North and Yourdon to make money for themselves. Gee, where have you been, come to think of it? Over the past month, we've been enlightened, righ here on this very forum.
Even more, Andy, you owe it to the nation to keep all money in the banks because, you see, otherwise people will panic even though Y2K is just a fantasy and nothing bad will happen. Unless you take money out of the bank. You say it's your money? What does that have to do with it?
Go back to sleep, you sleepy-head.
-- BigDog (BigDog@duffer.com), April 01, 1999.
LOL here. Andy, please give a mechanism for bank failures that makes some sense. RUNNING OUT OF CASH ON HAND IS NOT A REASON FOR A BANK TO FAIL. IT DOES NOT WORK THAT WAY. You are assuming that not being able to get cash will panic every customer of a bank. Business customers are the bulk of bank business today - they do not panic that easily. Does your grocery store go out of business if they run out of toilet paper because of a winter storm rush? Moreover, not everyone is going to withdraw $1000 bucks, many of those that want cash on hand already have it - etc. etc.
-- Paul Davis (email@example.com), April 01, 1999.
Paul, of all of the April 1st funnies I've heard this morning, I will have to give yours the best so far (though its still early). If I didn't know better, I would think in fact you were just fooling, but I know better -- you are completely serious.
Well, OK, maybe it would not bother Paul Davis to know that his "money" was not available in cash, but I can tell you that it would -- and will -- bother a lot of other people!!!
-- Jack (firstname.lastname@example.org), April 01, 1999.
"Does your grocery store go out of business if they run out of toilet paper because of a winter storm rush? Moreover, not everyone is going to withdraw $1000 bucks, many of those that want cash on hand already have it - etc. etc."
Interesting way of putting it! Could this be one of those Freudian Slip situations? Green Back toilet paper? etc. etc.
-- tp (email@example.com), April 01, 1999.
So you ask for your money and they give you a certified check, and the guards hustle you out the door. So you go to the bank down the street and deposit your check, and then buy your groceries with a personal check, same as always. Gee, what did you gain?
This business of likening the banks today to the banks of the thirties overlooks so many points that it is just incredible. Just one example - most business done at that time was done in cash. Now most business is done by check or direct deposit. I barely remember seeing someone who got paid in cash with a pocket full of money when I was a kid. I doubt anyone else that has posted here can remember anyone who got paid in actual cash. NO ONE expects a bank to keep cash on hand to cover all deposits now. It is neither required nor necessary.
-- Paul Davis (firstname.lastname@example.org), April 01, 1999.
One problem here, if there is a problem of any kind, stores want to deal only with cash. If a store doesn't think they get the cash from a check, they won't accept the check . . or a card .. . or anything but cold, hard cash. If yours is in the bank, what are you going to do if the bank says you can't have it?
-- winna (??@??.com), April 01, 1999.
Andy! Welcome back! Thanks for making me worry again : )
Let's say that a lack of cash on hand does not cause a bank to fail.
However, there is a drop in confidence in the business community and the public sector with regard to the "value" of the dollar. After all, banks are operating in a JIT situation too and if people and business don't have access to the "feel" of cash then it could pose real psychological problems.
This loss in confidence causes property values to fall and the stock market to drop and consumers stop buying goods and services. The bank is now losing money because it's holdings are no longer holding their value. People and business now suffer an even deeper loss of confidence seeing that their investments are losing equity. Property values drop, credit becomes more and more difficult to obtain...
...it's all dominos Paul, just like Y2k.
I would feel much more confident that I had dollars in my pocket at a time when a Debit Card purchase may not be possible due to Y2k. And, these days, even a check goes through an instant check to see if funds are available.
All of this must be done with a working, interdependent, interconnected, computer network in operational, working order.
Your choice is to say that everything will be just fine and my choice is to be ready just in case you and the banks are wrong.
-- Michael Taylor (email@example.com), April 01, 1999.
I can't believe that you don't understand banking any better than that!
It makes no difference whatsoever whether a depositor takes his money out of a bank in currency or in the form of a certified check. There is a Fed mandated ratio between loans outstanding and funds on deposit that must be adhered to regardless of whether the deposits are in currency or magnetized spots on a disk drive.
The guy who walks off to the other bank with a certified check changes that ratio, and the bank must call some loan value to restore it unless they can attract enough "new" deposits to offset those that they have just lost.
If enough people take their money out of a bank, no matter what the form that money is in, that bank will fail!
-- Hardliner (firstname.lastname@example.org), April 01, 1999.
Paul, the points you are missing are these. 1 - Due to fractional reserve accountingit does not take all, or even a majority of depositors to break a bank. Typically 3-10% is enough to do it. It doesn't matter if they pull it out in cash or check form. Now that's for ONE bank. If they pull it out as cash, that removes that liquidity from the entire system. so, if a significant people pull out in cash this can cause multiple bankruptcies. 2 - Fractional reserves is s double edge sword, a bank can become illiquid via either the withdrawl route or the reduction in loans route. Now if the loans are reduced via being paid off, no problem for that single bank, however the liquidity of the entire system is reduced. A more probable route is by the defaulting of loans exceeding loan reserve accounts. Of course the worst of all worlds for a banker is when people cash out their checking and savings to reduce their debt, no additional customers want to take out loans, and some loans default pulling down the reserve accounts.
P.S. In the mid 1980's (this info comes from the WSJ), I can't remember the exact year, a bank in Chicago (I remember that) whose name I think was First Continental(??) went bankrupt in an interesting manner. There was an article written about the bank from some US source. The article was mistranslated into Japanese and re-published in Japan. The mistranslation gave the incorrect impression that the bank was in trouble. All of the large Japanese depositors pulled all of their accounts via wire transfers. That was during the day in Japan, at night in Chicago. Bingo, the bank opens in the morning to find that it is insolvent. If anyone doubts this, just read all the WSJ's from the 1980's, it was front page news (I think section A), so it'll be easy to find.
-- Ken Seger (email@example.com), April 01, 1999.
Ken: your memory serves you well: it was First Continental in Chicago.
-- Spidey (firstname.lastname@example.org), April 01, 1999.
Try living in the real world. If banks gave people certified checks instead of their cash that would be stealing in the minds of their customers. Some would accept it. The rest would tear the building down and feel justified in doing it. It may not be legal but who can say it is not right. Do not make the misake of thinking people will not try to get their money. They will do this if only to be safe. There will not be enough money to pay guards to die for the sake of bankers.
-- Mike Lang (email@example.com), April 01, 1999.
"RUNNING OUT OF CASH ON HAND IS NOT A REASON FOR A BANK TO FAIL. IT DOES NOT WORK THAT WAY."
Uh, OK Paul :)
Another thing to remember, small businesses have to pay their employees and creditors. Small business owners (and large and larger ones for that matter) are not known to be inherently stupid - though many are :)
You will find that an exceedingly high percentage will want cash on hand as the day approaches with which to effect their daily transactions the old-fashioned way.
This has not been taken into account by the majority of observers yet is the MOST important factor in the undoing of the Banking system PRIOR to rollover. At rollover, corrupt IMPORTED DATA sloshing around the world financial system will cause the mother of all Bank "holidays"... it will not be a holday, it will be an extended sabbatical :)
Glad to see you're still on the ball Paul, you had me going there for a nanosecond.
-- Andy (2000EOD@prodigy.net), April 01, 1999.
Andy, get your arse over here to the new polly board and help me, huh??
-- Lisa (firstname.lastname@example.org), April 01, 1999.
Usually the attack on the fractional reserve system is following closely by an argument that we should return to the gold standard. In extreme cases, the advantages of a barter economy are applauded. Do you want all of "Economic 301: Money and Banking" or just the short version on the realities of currency and fractional reserves?
Oh, if you just want me to admit that a bank run can close a bank... I admit it! As you can tell, this is not my favorite area of economics. Most students doze somewhere between M1 and M3.
-- Mr. Decker (email@example.com), April 01, 1999.
Yes, Decker & Davis (are you one and the same?)...all this talk in the banking community now being reported by the media concerning "Discount Windows" and "Currency Reserves" and "Payment by Cashiers Check" and "Reporting Cash Withdrawals" and "Banks not Compliant Will Be Closed" and "Don't Worry - We're Confident We'll be Ready" ... is nothing to be alarmed about. Just Business as Usual huh?
-- banker (firstname.lastname@example.org), April 01, 1999.
Banker: no, come on really, what are you, the custodian?
-- guess jeans (???@who.dat), April 02, 1999.
If the banks fail, what do you think your cash will be worth? The only thing you fract-anal reserve haters will have is green TP. The system will go full-on electronic. Cashless!
OOOOOOohhhhh.... can you say "nwo"?
-- (email@example.com), April 02, 1999.
What? - I believe you have blundered into the agenda that is being orchestrated - how astute of you :)
Lisa - I'm knackered, been working all night - give them hell! time is of the essence and all that - see you'se laters...
-- Andy (2000EOD@prodigy.net), April 02, 1999.
No, I am not Mr. Decker. Curiously enough, many years ago, I knew a banker with that name who talked a great deal like Mr. Decker. However, that fellow is long since dead of cancer.
As for cashless - I doubt the economy will ever become truly cashless. Far too much of our economy is 'underground' and could not be supported in a cashless society. So I think cash is here to stay, in one form or another.
-- Paul Davis (firstname.lastname@example.org), April 02, 1999.
"As for cashless - I doubt the economy will ever become truly cashless. Far too much of our economy is 'underground' and could not be supported in a cashless society"
This is one of the reasons "they" want a digital society - no more underground economy (other than bartering), total (almost) control.
Believe me, this is what is on the agenda.
-- Andy (2000EOD@prodigy.net), April 02, 1999.
Don't think so Andy. Why do you think the US spends a ton of money on really stupid drug laws? Because the politicians get election money from people (many linked to the drug trade) who do not want legal drugs. And it will stay that way unless it becomes a great public cause - which is not likely unless the prison population tops 1% of the general population. That might do it. The cashless society won't happen unless the general public loudly demands it. And it might not even then. The public demanded term limits pretty loudly a few years back, and did not get them. The public has periodically demanded an amendment relating to balancing the budget - hasn't happened. And the underground economy pays for a lot of political advertising - and election money is the tail that is wagging the dog nowadays. People who argue against limiting amounts spent on election campaigns have no idea just how corrupt the system has become. If you really want to influence public policy, donate the maximum to every candidate who is on a committee that writes policy on the matter you want to change. You will have much more influence that almost any letter writing campaign or other form of grassroots pressure.
-- Paul Davis (email@example.com), April 03, 1999.