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Yakk · 11-27-2008, 06:38 AM

Are you ok with the Chinese government owning most US banks? They have the capital, if they want to risk it.

An otherwise solvent bank can become insolvent if enough other banks go under, because of their mutual obligations and hedgings. When a bank goes bankrupt, trade locks up -- accounts cannot be accessed, etc. The debts the bank owns can be sold, but selling them _quickly_ will cost a pretty penny, and in a cash-poor situation even selling them slowly will probably not be enough to cover depositors.

The fear of banks going bankrupt leads to people pulling cash out of banks and into safer options. Even if your bank is doing fine, proving this is hard -- so your cost of credit goes way up. Which means your investments which where fine are now costing you money, and your balance sheet starts getting worse. Until you are upside down, and if you _do_ tell people the state of your finances, they would pull their money out.

This wasn't just a domestic problem. Banks around the world bought up US securities that where backed by the credit of various US banks, under the assumption that they where top-tier quality debt. Drop the quality of that debt, the value of that debt drops, and the banks end up being ... upside down, with balance sheets that do not show positive net worth.

In order for someone to buy them out, that someone has to has to _want_ those balance sheets, and have enough raw cash to _pay_ for the difference in value. And everyone's balance sheet got squeezed by the increase in cost of credit, so I seriously doubt that all of the 'sound' banks have enough $ floating around.

All of this encourages people to take cash, and not invest it in a way that allows for automatic re-investment (which makes some sense, as the automatic re-investment that you engage in when you have cash in a savings account ... turns out it wasn't returning all that good returns).

11-27-2008, 06:38 AM	#24 (permalink)
Yakk Wehret Den Anfängen! Location: Ontario, Canada	Are you ok with the Chinese government owning most US banks? They have the capital, if they want to risk it. An otherwise solvent bank can become insolvent if enough other banks go under, because of their mutual obligations and hedgings. When a bank goes bankrupt, trade locks up -- accounts cannot be accessed, etc. The debts the bank owns can be sold, but selling them _quickly_ will cost a pretty penny, and in a cash-poor situation even selling them slowly will probably not be enough to cover depositors. The fear of banks going bankrupt leads to people pulling cash out of banks and into safer options. Even if your bank is doing fine, proving this is hard -- so your cost of credit goes way up. Which means your investments which where fine are now costing you money, and your balance sheet starts getting worse. Until you are upside down, and if you _do_ tell people the state of your finances, they would pull their money out. This wasn't just a domestic problem. Banks around the world bought up US securities that where backed by the credit of various US banks, under the assumption that they where top-tier quality debt. Drop the quality of that debt, the value of that debt drops, and the banks end up being ... upside down, with balance sheets that do not show positive net worth. In order for someone to buy them out, that someone has to has to _want_ those balance sheets, and have enough raw cash to _pay_ for the difference in value. And everyone's balance sheet got squeezed by the increase in cost of credit, so I seriously doubt that all of the 'sound' banks have enough $ floating around. All of this encourages people to take cash, and not invest it in a way that allows for automatic re-investment (which makes some sense, as the automatic re-investment that you engage in when you have cash in a savings account ... turns out it wasn't returning all that good returns). __________________ Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.