Friday, January 13, 2012

What is a bank run, and why you should care

Welcome to another installment of the Be Prepared Channel. Today we are going to talk about something that you will rarely if ever hear spoken of in the main stream media. Honestly even if you did hear anything about it in the media you can bet that what your hearing is going to be trying to calm people down and try to reassure you not to go to the bank. It is for this very reason you should understand how volatile the banks are and why you need to know what a bank run is and how it works.

Banks, the financial system, ponzi scheme?
The financial system in the United States and around the world for that matter are controlled by central banks and large global financial institutions. There is a very long history to how this financial system has developed, but lets just summarize by saying that this system is setup using a method of banking called fractional reserve banking. In a nutshell your bank or financial institution has been allowed by law to lend out huge portions of their reserves(ie your deposits) and only required to keep an extremely small amount of cash on hand. Here is what the Federal Reserve requires the banks to have in reserves:

Reserve Requirements
Liability Type Requirement
% of liabilities Effective date
Net transaction accounts 1
$0 to $11.5 million2 0 12-29-11
More than $11.5 million to $71.0 million3 3 12-29-11
More than $71.0 million 10 12-29-11
Nonpersonal time deposits 0 12-27-90
Eurocurrency liabilities 0 12-27-90

Now you read it right, if your banking at a small institution they are not required to have any reserves set aside, and the top requirement for large institutions is 10% reserve. Now what does this mean to you and me? What it means is that the best case scenario is that your bank might have up to 10% of all the money it has as deposits available for withdrawal. The rest of it is tied up in contracts, loans, and other instruments. We won't get into CDS's, and other crazy risky counter party risk insurance policies or the riskly lending these banks have made or the amount of money they have lost in this installment, but let's just say these banks are in a panic trying to figure out how to cover loses.

Now if you have ever read or recall hearing the stories of the great depression and how gold caused the financial ruin of the country because they couldn't expand money supply you will start to question the story told by the bankers. What caused the financial problems was the fact that the banks loaned money and didn't have, they used risky lending practices and took huge loses, and did not have the reserves to meet the cash demand. The Federal Reserve did not know what debt, loans, and money creation had taken place and did not ensure that the financial system had the liquidity. But instead of owning up that the central banks didn't do their jobs they chose to blame the stock market, and gold as the reason for the panic and depression that hit the country... Fast forward to today and the exact same story is playing out, but don't worry the bankers are already lining up to blame governments, Wall Street, and your dog for the problem since gold is no longer backing the US currency. The fact that their system of reserves and capital requirements are flawed, and their ability to monitor, track, and manage the money supply is severely flawed is at the heart of this massive problem. To add insult to injury hese global financial institutions are so large that they pose a risk to the global economy.

So what does this mean to you?
Your bank does not have the cash on hand to withstand even a moderate number of people coming in and withdrawing funds. In a global economic environment like we have today the entire system globally is extremely fragile and it won't take much in the way of bad news to send people running to the grocery stores, banks, and gas stations. If this does happen we will see runs on the banks... IE people going in to take money out, and the bank will not have the funds. They will lock you out of your account, and may lock you out of the bank as they close the doors until the panic calms down. In previous times when this happened the banks locked you out of your funds for a period of time, and then later only allowed very small withdrawals on a daily or weekly time frame. This situation creates serious problems when you cannot pay your bills, buy food, or cover basic expenses.

Sadly what has happened is the banks now rely on FDIC insurance to cover losses(IE you and I get to eat it when the banks mis-manage their businesses). The situation today is that FDIC is broke and is now getting bailouts from you and I to keep bailing out banks. Many banks are being closed every week as we speak and have been getting gobbled up at an alarming rate since 2008 when this ponzi scheme started to unravel. So you take your own risks by assuming that FDIC will be there to get your funds back. The time it could take to restore your access to your funds could also be questionable if this situation gets really bad.

Here is a video explaining a small snippet on what a bank run is:

What can you do to protect yourself?
In a situation like this where banks don't have money, and can get swamped very fast with requests for money and your access to your account via your debit card, credit card, ATM's will not work as the financial system freezes. Anyone with cash will be KING! We can read stories of what happened in Argentina and other places where this has happened and anyone who had cash on had as the banks were shut down were able to buy food, goods, services while others were left to wait as the black market popped up and people began to barter and trade. So the "smart money" makes sure that we have emergency cash on hand for just this type of emergency along with ample supplies in your larder/pantry/food storage plan to ensure that we have our own needs met, but also items to barter/trade in this type of environment. Each payday stuff a little cash in your cookie jar for that rainy day... cause it is going to be a monsoon!

The moral of the story is that our financial system is in complete disarray. Sadly very few politicians have the guts to require stiff capital reserve requirements for the banking system, or to hold these banks accountable for their actions, or to even let them fail and allow healthy companies to buy up the good assets and make a thriving business from it. So we need to take steps on our own to make sure we have cash available to us for an extended duration bank lockdown, barter/trade supplies, and maybe even diversify with precious metals. But don't keep all your eggs in one bank... I mean basket! LOL Take steps to ensure you have resources available to you in case our financial system is locked down or collapses. You will be doing yourself and your family a great favor. NOTE: That you may not be able to get to safety deposit boxes either, so don't have that is your sole plan in the event banks are locked.

We don't have to be one of the people rioting in the streets for something to eat, a place to stay, or the ability to take care of ourselves. Take the precautions today to learn more about the fractional reserve banking system, and what is wrong with the way it works. You will be glad you took the time to learn and understand how this works and to take the kinds of steps to protect yourself and family.

Take Care,

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