Savers shoulder the inevitable burden of bad loans
Britain’s new coalition government likes to remind voters we are all in this together. The phrase is rather glib. But in an important sense savers and borrowers around the world are finding the costs of reckless lending are falling on the innocent and guilty alike.
Few people this century will have experienced what it is like to turn up at their bank and be told they cannot withdraw deposited funds because the bank has “suspended” payments.
Suspension sounds harmless. But before the spread of deposit insurance, the word was enough to strike fear into the hearts of depositors, who risked losing much if not all their life savings, and being made to wait months or years for access to what remained.
Between 1930 and 1933, more than 9,000 banks across the United States were “suspended”, accounting for $6.9 billion or 15 percent of all deposits in the country, according to official figures. Behind those numbers are tales of misery for families, farmers and small businesses suddenly left without funds when their bank was suspended or collapsed forever.
So terrible was it, that even the threat of suspension could produce long lines of anxious depositors outside institutions trying to withdraw cash before the tellers closed their windows. In 1907, long lines marshaled by police formed outside the doors of the Knickerbocker Trust Company on New York’s Fifth Avenue as the depositors (“mostly small shopkeepers, mechanics and clerks”) tried to pre-empt suspension.
“Stacks of green currency, bound into thousand dollar lots, were piled on the counters beside the tellers. One by one these stacks were broached and they dwindled rapidly. Clerks went to the vaults from time to time with arms full of notes, piled up like bundles of kindling wood,” according to an account published by the Washington Post and reproduced in Robert Bruner and Sean Carr’s monograph “The Panic of 1907″.
“As the morning wore on many more depositors arrived carrying satchels, showing they were ready to carry off large amounts. One young man, with his hands trembling, stacked his trousers pockets full of one-hundred and twenty-dollar bills.”
“If true, real GDP will be around 15 percent lower in 2018 than it would have been in the absence of the crisis. Together with the extra millions of unemployed, that is the measure of the real cost of the financial crisis.”
The crisis was just the death by natural cause of the financial bubble that helped create the false prosperity reflected in past great GDP figures.
You can call it ‘false growth’.
The scary part is that the same mentality, interests and politics, which inflated that bubble are still dominant – both in WS and in DC.