UK Bank Run: It Could Happen Here

It is that dreaded bank run, but this one happened to be a mortgage company in England. We find this a bit weird to see in a country like England. The Bank of England stepped in with a direct loan to bail out Northern Rock. And lucky for us, the Fed stepped in behind the scene by lowering the rate at the discount window and allowing U.S. banks to push capital through to their affiliates. Was there some wisdom behind Glass Steagall Act after '29? (Glass Steagall Act post)

Happily, we don’t have these pictures all over our news. The US consumer can chalk it up to a foreign issue. That is why the confidence numbers where so important last week. If we see a major bank failure in the US, we are in for some serious rough waters.

As we continue to pound into the heads of the people in internet land, who read this site, banks are the oil that allow the machine to keep grinding. Consumers (corp, govt, private) are the fuel, which provides power to the machine. Without either, you are at a dead stop. Just to continue the analogy a bit further: The machine will simply stop without fuel. No real worries, you can put more in and may have to bleed a line or two, but it will run again. If you don’t have oil (banking), the machine breaks down and quits working.

If you look back to '29, the bank failures and runs internationally and domestically put us into a much worse situation and caused the depression to be alot more severe than it would have otherwise been. We have to double check, but I believe the bank collapses in 1929 started on the other side of the pond first. Remember, 1928 was a credit bubble that popped in '29.

Check this link out to really get your fear level up:

Fears Spread among U.K. Bank Customers

Comments

[megiddo666:]

Hi Keith,

Thanks for the thoughts. Living in the UK, it does make the Northern Rock Bank run more realistic, especially when members of one's family are going through the angst of it all. However, the Bank of England has stepped in and guaranteed deposits to avoid significant damage to the global financial system.

As to which side of the pond the bank runs began in this crisis, I think Countrywide withdrawal lines might be a very fresh memory to some in California and other US states.

2007 Sep 17 11:53 PM

[keith:]

Ben, I am truly sorry to hear about your relatives/family. Yes, I think in this case all will be ok, as the central bank has stepped in.

In this case there is a slight difference. I agree that the US started the sub-prime mess, but we have not had a major bank run. In the case of country wide and the mortgage companies before that, these where not banking institutions. Northern Rock seems to be both. The conversation on the site has revolved around the need to most likely continue to keep these businesses separate, which happened under our Glass-Stegeal Act

2007 Sep 18 04:36 AM

[keith:]

As promised, here is the information on the bank collapse. I was a bit off. It started in 1931. See link

www.futurecasts.com/De...

2007 Sep 18 06:51 AM

[volleyballm...:]

What point does this article have except for fear-mongering?

"Check this link out to really get your fear level up:"

What kind of statement is that?

To use your analogy, there is plenty of 'oil' to go around in the US Marketplace. There is no reason to believe otherwise.

Just because a few poorly-managed financial funds squander 100 billion in bad loans, this doesn't even begin to put a dent in the national wealth, which is something like 50 trillion.

Bad banks and mortgage companies might go out of business, but the ones that don't will have learned from the mistakes that were just made.

A Side-Note:
US Recession? Maybe. But that is to be expected when Americans have gorged on imports for the past 5 years, while foriegners got rich off of us.

With the quickly devaluing dollar, not only to foreign loaners (to the US) lose money, but our exports become all the more attractive, and our imports less.

If you want a real-world example of this, take a look at the number of European companies preferring Boeing over their own Airbus. It's cost-savings pure and simple. A weak dollar allows this.

2007 Sep 18 09:30 AM