A world without banks

Posted on October 7, 2010
Filed Under finance | Leave a Comment

I don’t know how seriously I take the claims of financiers that say the money market is the dynamo of the economy. It seems that their role in managing demand economies  amounts to nothing more than encouraging bubbles and then getting out before the bust.  The recent enormous and unprecedented investment of public funds to support a system whose own philosophies staunchly oppose such intervention, demonstrates that their belief in the Darwinian leanness of competitive advantage only extends as far as profit making. Nonetheless, the thought of a world in which the banking system had failed, is more than harrowing. This article discusses how close we came to seeing the American and thus, the world financial system collapse and then goes on to show just how resistant the sector is to accepting blame for their part in the system’s failures.  Lets hope, that  serious changes are made to avoid it ever happening again. Though from the sound of some of the tough talk coming from Wall street recently, it seems that the mega wealthy find it very hard to learn.

From The Guardian

It is worth considering what a failure of the financial system would have entailed. Nicholas Colas, director of research at the financial technology firm BNY Convergex, says the credit crunch exposed the sheer precariousness of the global economy. He points out that there are only about $850bn worth of US banknotes and coins in circulation, of which about half are overseas at any time. That means there’s little more than $400bn of actual money in the world’s largest economy, which has an annual gross domestic produce of $14tn: “The economy runs on making sure every party trusts every counterparty. And there’s really not a lot of physical money to support that trust.”

Just as a run on the bank left Bear Stearns exposed, a run on the entire banking industry would have left the monetary system naked. That, says Colas, is why the US government opted to step in, however reluctantly, to prevent Wall Street’s vast institutions from collapsing: “The government made decisions, at at least two points during the crisis, that you couldn’t have a change in the financial system caused by an exogenous crisis almost overnight – in other words, that banks were too big to fail.”

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