Thursday, October 02, 2008

2008 Like Great Depression,'Run On The Bank' Causes Failures

There are some scary similarities between what is happening today in the United States financial markets to events that happened back in the 1930's that lead to the Great Depression. The most basic thing that is the same today as in the past involves Americans and businesses making financial decisions while in a state of panic.

Most of the recent bank failures have not been due to bad loans in their portfolio, but instead they have been traced back to a massive 'run on the bank'. History teaches us that in the lead up to the Great Depression, thousands of people rushed to their local bank to withdraw all or most of their money because they were afraid their bank would go out of business.

That same 'run on the bank' mentality is happening again today with one small exception. Rather than people and businesses closing their accounts and withdrawing all of their money, like happened back in the 1930', this time they are only withdrawing cash that is in excess of the $100,000 FDIC insured limit. While most of these banks are not losing all of the money that was deposited, they are losing billions of dollars because some customers and businesses have – in the past – kept millions of dollars on deposit at large banks because they mistakenly believed that large banks were, 'too big to fail'.

No comments: