I have read a lot of fear-mongering lately regarding bank runs. Having studied the psychology behind such actions in the past admittedly little, I do not believe the initial conditions exist for such an event today.

The initial conditions to which I refer involve the legitimacy of any given banking institution. A "critical mass," of a sort, of inidividuals who distrust the banking (or fractional reserve) system must accrue more legitimacy to themselves than is held by the institution. They need not be a majority in number, but in influence.

In the past, when people lived in tighter-knit communities and everyone knew their neighbors better and news travelled more by word of mouth than anything (at least in these communities), a bank run was possible. Therefore, my first problem with the possibility of a run on any particular bank is: From whom would the "trigger event" news originate?

Second, the fractional reserve system, for all it's flaws, has achieved acceptance of the fact that not all of anyone's money remains locked in a vault at the local bank. In the past, the general concensus was that all the cash was, in fact, awaiting everyone at the local depository - when it was not. So my second problem with this probability is: What would be the psychological trigger for "storming" the branch of a local institution?

Last; in the past, banks were very individualistic and isolated institutions. Now, they work together much more closely. They lend each other money, for instance - electronically and in cash. And, since electronic cash transfer has nearly gained the legitmate acceptance of the public that cash transactions have (at least in the West), it is considered legal tender by most. Therefore, my third conundrum regarding modern bank runs is: Wouldn't a "successful" run on any bank or institution have to deplete all cash reserves in a nation before the institution was forced to close it's doors?

Regards,
Andy Ray

-- Andy Ray (andyman633@hotmail.com), September 13, 1999

Answers

1) MULTIPLE surveys suggest that a LARGE percentage of the population (and we're talking about 30-45%) expects to "take some money out of the bank" at some time in late 1999. If this segment of the population tries to do so (and greater than 20% indicated a large ammount), then there will be a bank or two that have to close. With the current media marginal propensity to histerics, that or those bank (s) closure will supply a trigger event by themselves.

2) Besides, ANYTHING is possible. I'm about ready to say that I can't be shocked by ANYTHING that might happen, but I KNOW when I do that, SOMEONE will figure a way to do something that succeeds. A Sidney Skate I ain't.

Chuck

errrrrr for the chronologically challenged, the reference is to a 1960's book called "Shockproof Sidney Skate" - jewish kid growing up in broken home, etc., etc., etc. . . . . . . .

-- Chuck, a night driver (rienzoo@en.com), September 13, 1999.

--- Andy Ray proposed

"...In the past, when people lived in tighter-knit communities and everyone knew their neighbors better and news travelled more by word of mouth than anything (at least in these communities), a bank run was possible..."

---no talking please ponders /// Marketing texts still say that a firm's best source of sales is word of mouth, on the order of 69%. ///

-- no talking please (breadlines@soupkitchen.gov), September 13, 1999.

OH just read the last parts ofthe post. The "acceptance" of the fact that the money is not in the vaults is a very thin vineer on the society. Most people will think that they understand it until they try to make the critical withdrawls.

And NO a run on one bank will close its doors because there is NO WAY that there will be enough cash in the vaults to satisfy the customers in the line, and no way to get the cash there when the line forms because we have NO CLUE WHICH bank will need the cash until it DOES. NO bank is going to send its cash reserves across town to another bank in trouble because this sort of thing is contagious. For evidence of the contagious nature, we only have to go back to the mid- 1980's and the fiasco in Ohio in reference to STATE CHARTERED banks. There were problems in STATE chartered banks, and the customers, being not too sure that it did not enclude THEIR bank made life miserable for ALL of the Ohio banks, and caused a statewide bank holliday, which lasted long enough for the PR folks to be able to engender a distinction between the STATE and FEDERAL chartered institutions. And for the rest of the STATE chartered banks to get a Federal charter.

Chuck

-- Chuck, a night driver (rienzoo@en.com), September 13, 1999.

Anybody got a spare conundrum?

-- Porky (Porky@in.cellblockD), September 13, 1999.

Any Ray:

1. It is patently clear (to me at least) that the Feds single- mindedness on y2k can be explained by simply assuming that they fear a bank run above all else (including a death toll). Maybe this is all part of contingency planning, but the mantra -- "your money is safe" - - is being chanted at the expense of a potentially better one -- "your family may not be safe".

2. What would be the trigger event? How about ten channels worth of 24/7 news reports?

3. As an aside, my credit union manager said that they planned to have plenty of cash as well as a couple of armed guards as we get closer to the date. Good news? Bad news? Who knows?

4. For the record, while I tell those close to me to worry about their food and money supplies, I also believe that it would be counter- productive for anybody of authority to warn people that their money is not safe. That Navy guy on CNN who supposedly said to have 60 days worth of cash stepped over the line in my opinion. (Yelling "fire" in a crowded theater may not be the most prudent move even if you smell smoke.)

Best Regards

-- Dave (aaa@aaa.com), September 13, 1999.

If you have cash readily available, why worry about bank runs? It will be rather amusing though watching the fist fights and hair pulling on TV. KoS, maybe they'll even set up a mud wrestling rink in the bank parking lot, now that's something to wish for. Bardou

-- bardou (bardou@baloney.com), September 13, 1999.

Check out Gary North: http://www.garynorth.com/y2k/detail_.cfm/6104 I read the article, but don't remember where it is located.

-- winna (??@??.com), September 13, 1999.

Gosh, bardou, maybe banks ought to start promoting female mudwrestling out in their parking lots NOW so they can raise CASH! I mean, that is at least as reputable as trying to get college kids hooked on credit card debt, which these frigging banks are up to their eyeballs in doing.

And Andy Ray, since we are trying to be extra generous to Mr. Decker today, let me actually give you a serious answer to a couple of your questions:

The "trigger event", sans word-of-mouth, could easily happen via the Internet. Even if most people are not Internet accessible, nevertheless most know someone who is, who certainly can "get the word out" that the banks are goiing to get hit with depositors wanting all their money in cash.

Your belief that electronic promises to pay are as generally accepted as cash may hold true TODAY. But it is the FEAR (which you undoubtedly think is completely irrational) that this will not hold true come Jan 1 that would completely render this assumption of yours invalid.

-- King of Spain (madrid@aol.com), September 13, 1999.

Andy Ray,

I disagree with you, for the reasons mentioned above. But it was a good try.

It's fine that you differ with the doomer majority; I like that. But I object to the term "fear-mongering" used to describe those who believe that a bank run is likely to occur. They are not trying to create one. They really believe that it's highly likely the electronic money system will be non-viable in 2000. They feel no obligation to be silent; on the contrary, they feel obligated to warn like-minded people (those preparing themselves and their communities for Y2k) about it. Use of the term "fear-mongering" is unwarranted.

Liberty

-- Liberty (liberty@theready.now), September 13, 1999.

Wow

A second interesting question from AR.

I thought a bit of history from last year would be in order. Last year a financial meltdown almost occurred and the FRB stepped in  an bailed out LTCM. While there is much more to this than the comment below, here is a snip from FRB testimony. (Below)

It is amazing that such a thing can happen to US markets in the most prosperous times. It was a precedent setting failure and if left for the market forces to fix then we wouldn't be having this conversation.

The thing is Andy Ray, all the FRB managed to do was fix the immediate problem and shore up the accountability of institutions within  the borders of the US. The same problem can happen again elsewhere in the world. Or in the States for that matter.

AR one thing you can't do is trivialize this because of all the information in the FRB documents.

What is going to start bank runs? Idiots like LTCM pivoting Billions of dollars because of GREED.

 FRBNY Before the Committee on Banking and Financial Services
 

Good morning Mr. Chairman and members of the Committee.
I am pleased to appear before you today to describe the Federal
Reserve Bank of New York's role in the events leading up to
the recent private-sector recapitalization of Long-Term Capital
Management and its fund, Long-Term Capital Portfolio.

Big Snip

Two factors influenced our involvement. First, in the rush of
Long-Term Capital's counterparties to close-out their
positions, other market participants -- investors who had no
dealings with Long-Term Capital -- would have been affected
as well. Second, as losses spread to other market participants
and Long-Term Capital's counterparties, this would lead to
tremendous uncertainty about how far prices would move.
Under these circumstances, there was a likelihood that a
number of credit and interest rate markets would experience
extreme price moves and possibly cease to function for a
period of one or more days and maybe longer. This would
have caused a vicious cycle: a loss of investor confidence,
leading to a rush out of private credits, leading to a further
widening of credit spreads, leading to further liquidations of
positions, and so on. Most importantly, this would have led to
further increases in the cost of capital to American businesses.

Let me be clear: had we not just experienced in August
precisely this type of shock to our credit markets, had we not
just seen a sudden, worldwide straining of investor
confidence, had there not already been underway a flight of
capital away from private credit and into Treasury securities,
were much of the world not experiencing financial strain, then
our judgments about the risks to the American economy of an
abrupt and disorderly close-out of Long-Term Capital may
well have been different.

******But, in the circumstances that did in
fact exist, it was my judgment that the American people, whom
we are pledged to serve, could have been seriously hurt if
credit dried up in a general effort by banks and other
intermediaries to avoid greater risk.******** that the American people, whom
we are pledged to serve, could have been seriously hurt if
credit dried up in a general effort by banks and other
intermediaries to avoid greater risk.********

PS AR

"Having studied the psychology behind such actions in the past admittedly little,"

As this is the start of your question maybe you could clear up your meaning of this statement?? And if you know little about the subject how can you make the assessment;

"I do not believe the initial conditions exist for such an event today."

The conditions exist, its called DEBT. And that is a condition that exists. A default on a large amount of debt such as explained above by the FRB can cause what I highlited above.

-- Brian (imager@home.com), September 13, 1999.

One thing that could produce "bank runs", paradoxically, could be an attempt to put withdrawal limits in place.

That would get people's attention quickly.

I believe you would see some *very* creative attempts to bypass or circumvent those regulations. Not to mention lawsuits putting implementation on hold...........

-- Jon Williamson (jwilliamson003@sprintmail.com), September 13, 1999.

Andy Ray -

You've asked three very good questions. Let me attempt to answer them. Question #1 >From whom would the "trigger event" news originate?

The "trigger event" news has already occurred. Network news broadcasts have spread the word about Y2K to the vast majority of the people. Now, to their credit, most of the network news reports have tried to calm fears about Y2K, saying that nothing much is going to happen, particularly with the banking system, which is 'way ahead' of everybody else. But everybody knows that something might happen.

Question #2 >What would be the psychological trigger for "storming" the branch of a local institution?

The psycological trigger for "storming" the branch in question is the proximity of the day to Jan. 1, 2000. Let me use an analogy. I live in North Carolina where it very rarely snows. When it does snow, only a few inches fall and it is usually all melted by the afternoon. And yet, whenever snow is forcast, people crowd into the stores picking up bottled water and canned good to "ride out the storm". Logically they know that nothing bad will really happen. But they do it anyway, "just in case."

I would posit that a similar thing will happen around Dec. 31, 1999. People will "know" that nothing bad will happen, but they will take out some or all of their money "just in case".

Question #3 >Wouldn't a "successful" run on any bank or institution have to deplete all cash reserves in a nation before the institution was forced to close it's doors?

Now, you are entirely correct when you say above that electronic cash transfer has achieved legitimacy in Western society. However, the important thing to remember is that digital numbers are accepted as a symbol of actual cash, much as paper money was traditionally accepted as a symbol of actual gold. In the past bank runs occured when people suspected that the paper they held did not accurately reflect the amount of gold available from the bank. This time bank runs will occur because people suspect that the digital symbols of their money may not accuratly reflect the amount of cash available to them from the bank.

You ask, won't banks work together, loaning each other money to cover up for the other? And I say, of course they will, to an extent. Obviously, a bank isn't going to give a competing bank its last $2000 cash reserve, however, if one bank has plenty of cash on hand they probably will accept a electronic promise to pay from another bank.

But the problem then becomes one of time of transportation and modern electronic communication. Can the bank move X dollars, where X is some large number, to its branch to satisfy its impatient and broke customers before they get upset and a) start calling friends and family, telling them to get their money out of bank X b) alert the newsmedia that bank X won't give them their money c) get on the internet and post to some heavily visited forum, such as this one, that bank X won't give them their money.

So now we've come full circle to question #1. People are not, as you say, as tight knit as they used to be. However, their ability to communicate has vastly increased. Through the miracles of modern communication a run on bank X could prompt off a run on bank X in another town.

This is why I (and many other doomers) see bank runs as virtually inevitable.

-- John Ainsworth (ainsje@cstone.net), September 13, 1999.

Andy Ray -- Yes, all these factors would tend to prevent bank runs, if thet were all true. However, I think your "second" factor (that people understand and accept fractional reserve banking) is wishful thinking more than fact.

In my opinion, people simply accept the banking system as given. They do not inquire into its inner workings. So long as they can write checks and can withdraw their money at will, the system is working and all is well. Beyond that they do not know the details or want to know them.

I believe that, if these simple tests that people use to gauge if the system is working were to fail, then fear and uncertainty about the safety of one's money would arise in the minds of a significant minority of people. How big a minority is "significant"?

Well, it is the reserve requirement of banks that constitutes the key variable in determining how many people may remove their money before reserves are exhausted. Those reserves are set at 2% of deposits. Those reserves are the slender reed on which the whole system rests. At 2% reserves, a loss of confidence among a very *small* number of people is enough to have drastic effects. So, a "significant" minority may well be as few as 2-3% of the public.

There is no reason why a fractional reserve system of banking must operate on such a thin margin of safety. Some Swiss banks operate at much higher reserves, over 10%, as a way of attracting more conservative depositors. IMHO, the entire US banking system has, by design, become highly fault-intolerant, due not to the nature of fractional reserve banking, but directly due to the reckless reduction of reserve requirements to a bare minimum.

What happens if that "significant" minority moves their money out of the current system? That's easy. The system implodes. This implosion could be slow, somewhat analogous to the slow crushing of a submarine that loses power and drifts below the depth of ocean it was designed to withstand. Or the implosion could be swift, as in the classic "bank run" situation.

If you think that a bank run must be sudden to be effective, you haven't thought through the problem. A run can just as easily be a long drawn out affair, as depositors withdraw, and the bank must liquidate assets to meet reserve requirements, weakening itself, so that it loses more depositors. And so on until it fails.

>> Wouldn't a "successful" run on any bank or institution have to deplete all cash reserves in a nation before the institution was forced to close it's doors? <<

Tsk. Tsk. Andy Ray! A bank could only acquire the right to disburse "all the cash reserves in a nation" if it had sufficient assets to allow it to borrow that much cash. Then it would have to pay interest on that money, somehow.

Banks may be privately or publically held, but they are businesses that make profits for their owners. They are supposed to play by the rules of a business. They "close their doors" when they go bankrupt, meaning that their liabilities exceed their assets. If the Federal bank examiners are doing their works, banks cannot go on like zombies, having no assets, and yet having drawing rights to "all the cash reserves in the nation".

If the FDIC closes a bank, the SOP is to have the failed bank's assets and liabilities absorbed by another, stronger bank. So, what could induce a strong bank to absorb the losses of a failed bank? Altruism? Not hardly. The FDIC sweetens the pot considerably by absorbing most of the liabilities itself, out of a stash of money for that purpose.

In the late 1980's the FDIC ran out of money. And the FSLIC crashed and burned in what became known as the Savings and Loan Debacle. Curiously, this proved the strength of the system in general. But it also cost a very hefty sum. We are still paying for it. As usual, the Congress put it on the "universal credit card" also known as the national debt, then Congress declared that the S&L debt was "off the books". Yeah. Right.

Now, how many of these little escapades do you think the public can finance? How good do you think our credit will be next time? What if there is a depression going on? And, is it "fear mongering" to ask these questions?

-- Brian McLaughlin (brianm@ims.com), September 13, 1999.

Brian is right on the money. The quiet bailout of LTCM was unprecedented. That means it never happened before. Your tax dollars were used to bail out a mismanaged offshore investment biz. Get a clue. I can't get tax dollars to pay off my little bitty $2000 Visa card! The whole fractional reserve system is based on the "Consumer Confidence Index", which means the whole system is based on your trust. Do you trust the system to work or not?

-- Tim Castleman (aztc@earthlink.net), September 13, 1999.

Andy Ray

The profound irony is that your rhetorical questions have triggered many thoughtful responses that, if read by many lurkers, could help create the heightened concern. With respect to banking (not food), I understand why the Feds must say, "Don't worry; be happy."

-- Dave (aaa@aaa.com), September 13, 1999.

Bottom line -- the U.S. (and world) money/credit/banking system is fraudulent. It depends entirely on public "confidence". The bankers have been running around like the old TV variety show performers trying to keep a bunch of plates spinning on poles.

There is only enough CASH to cover about 2% of demand deposits. (Most transactions are done by check, credit card, so that suffices to keep the show going, UNDER NORMAL CONDITIONS.) If there is any significant increase in cash demand, THE BANKING SYSTEM WILL IMPLODE.

This could be caused by merchants holding back a bit more cash rather than depositing it, people taking more "cash back" when they write a check at the grocery store, additional ATM withdrawals, "conserving cash" and paying for more things by check or credit card, etc. It would take only a few hundred to a few thousand dollars per person (depending on how many people "participate").

Cash -- withdraw early and withdraw often. Convert some (or a lot) to real stuff. (Even though it may eventually go back into the system -- the "float" can still cause problems.)

-- A (A@AisA.com), September 13, 1999.

* Bank runs / market CRASH by 12/99 at the latest.
* Major oil import problems starting 1/00.

do pretty html tags make it more believable ?

-- Dan G (thepcguru@hotmail.com), September 13, 1999.

See thread "GN Reality Check #42", posted just a short while ago.
The FDIC (a government agency) is lying to you. (So, what else is new?) "The big print giveth and the fine print taketh away."

Cash -- withdraw early and withdraw often.

-- A (A@AisA.com), September 13, 1999.