Your Money—Safe in the Bank?
‘MONDAY morning they began lining up. They braved bitter cold and an estimated five-hour wait. The calm assurances of bank executives, economists and political leaders merely heightened the sense of panic. All over the nation, indeed all over the world, an ever-increasing crowd of people were besieging the banks, making the same demand—GIVE US OUR MONEY!’
Might this be the news that you will read sometime in the near future? The Wall Street Journal recently quoted economist Alan Greenspan as saying that “the chances of a dangerous [bank] breakdown are the greatest in a half century.” Why so?
Where the Money Has Gone
Recall how thoroughly you were checked out the last time you applied for a small bank loan. Surprisingly, banks are not always so prudent when large amounts of money are involved. For example, Mexico, with its sizable oil reserves, easily obtained some $57 billion in loans. Then came the worldwide surge in interest rates and a drop in oil prices. Mexico stood at the brink of bankruptcy. A mini-panic among bank investors occurred as rumors spread that Mexico might default on these enormous loans. Emergency steps were therefore taken to pipe yet more money to this nation. While a crisis may have been headed off, other nations, such as Poland and Brazil, are also having difficulties paying off their huge debts.
Billions more are invested in businesses. In times past, large businesses financed their organizations by selling bonds (long-term loans) to the public. But when interest rates climbed, investors sold their bonds and invested in more profitable areas. Businesses were forced to turn to short-term, high-interest bank loans. Banks, however, could lose a fortune if these businesses went bankrupt. The recent collapse of the Drysdale Government Securities Corporation is a scary example of just how vulnerable banks are—it cost them $285 million!
Global Dominoes?
Economists thus fear that these factors could work together to produce a global domino effect. Suppose a foreign nation, or a number of large corporations, defaults. One or two major banks could go bankrupt. This, in turn, could frighten depositors in other banks, who might start a frenzy of bank withdrawals. Since banks keep only a moderate amount of cash on hand, there could be a massive liquidity crisis. Bankers would be desperate for cash. This chain reaction could expand into a worldwide economic collapse!
Bankers nevertheless say that such a scenario is unlikely. David Rockefeller, former chairman of the Chase Manhattan Bank, claimed in a recent interview that the banking system “is very sound.” True, “banks do a lot of business with one another, so there is tremendous interdependence.” But he felt it “most unlikely” that such a global domino effect would pull down the world banking system. Since the success of the banking system rests on public confidence, however, it is understandable that banking leaders speak so optimistically.
‘But surely a nation would not allow its major banks to fail,’ you might say. But that is exactly what the central Bank of Italy did! The collapse of the Banco Ambrosiano received much publicity because of its close connection with the Vatican. When the scandal-ridden bank failed, the Bank of Italy, to the surprise and consternation of European bankers, withdrew its support. Bankers fear this may have set a dangerous precedent.
“Peace and Security” in the Financial World?
The New York Times of October 10, 1982, claimed “insiders predict that fear of a breakdown of international finance will ultimately drive the parties to agreement.” During the economic collapse of the 1930’s, however, the nations shunned cooperation, and, instead, “sought to shelter themselves from the prolonged world-wide economic storm without regard to the harmful effects of their actions on other countries.” And there is little indication that the nations have had a change of heart. Inflation-ridden governments have, for example, allowed interest rates to rise, regardless of the devastating effect that it has had on poorer nations.
Nevertheless, the Bible does foretell that soon prominent leaders will predict “Peace and security!” (1 Thessalonians 5:3) To what extent this will involve some sort of worldwide economic patchwork remains to be seen. In the meantime, how does one deal with the world’s shaky economy?