How Banks Operate: Understanding the Money Multiplier and Its Impact on Confidence
- Banks use the money multiplier effect when customers deposit money
- Banks only hold a small percentage of total deposits in their vaults, while the majority is used to give out loans and collect interest
- Banks rely on customers not panicking and withdrawing all their money at once
- If people panic they can cause a collapse of the banking system as banks don’t actually have all customers’ money
- Deposits are protected by the government in case of bank failure, so customers can remain confident.
Government Seizes Control of Assets Following Bank Collapse
- The government raised interest rates to help stave off inflation and stabilize the economy
- SVB’s customers (startups) weren’t able to raise as much money due to the economic downturn, causing SVB to pull from their reserves
- To get more money, SVB began selling bonds early at a loss of 2 billion dollars
- This caused a “run on the bank” where customers withdrew 42 billion dollars in one day, causing the stock to plummet 80%
- The government stepped in and seized control of assets, making it second largest bank collapse in history
- The government’s main goal is to protect banks and help Americans have confidence that they are safe.
A Stark Reminder: The 1930s Bank Crisis and the Biden Administrations Intervention
- The 1930s saw 9000 failed banks and a lack of insurance caused by people taking their money out simultaneously
- In 2008, 500 banks failed and some were bailed out with taxpayer money to prevent a catastrophe
- The Biden Administration took measures to ensure those with accounts at collapsed banks would get their money back, regardless of the amount
- There is debate over whether or not the government should let banks fail or if they should always swoop in and save them
- The government’s intervention may have successfully calmed people down or could lead to more bank runs, failed banks, and a stark reminder of our mental construct for prosperity
- Ultimately, when the economy tanks, people tend to blame immigrants and poor people.