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Musings on the latest banking crisis

I've just been reading that the senate in the USA has backed a slighty changed version of the bail-out bill and that will go back to the house of representives on Friday. And also that Northern Rock have cut a lot of it's saving deals due to a large number of customers switching.

Apparently, because Northern Rock are government backed, any savings with them are 100% guarenteed, whereas savings with other banks are only guarenteed to the first £35,000.

Now, I don't have savings anywhere near 35k, but surely it makes sense that you want to be 100% guarenteed wherever?! Apparently people who had larger lump sumes in just one or two banks, are now taking them out and spreading them around different insitutions. And I can't say I blame them.

However, I was talking to someone the other day, and we were saying that if everyone in the UK suddenly got the willies about their savings (like they did with petrol) and went and tried to withdraw all their money, well, the banks really WOULD run out of cash, and that would spark a TRUE credit crisis. That's a scary thought, no matter how unlikely it is.

Still, seeing as I just spent all my remaining savings on my car, I'm not overly bothered!! Still, I like to keep an eye on the news, even if I'm not too great at keeping up to date or have good knowledge etc hehe.

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Hey Jen, new blog - coolio.

RE: "tried to withdraw all their money, well, the banks really WOULD run out of cash"

Oh they would run out of cash alright, check out "Fractional Reserve Banking" on Wikipedia, its how all the banks operate.

Basically if I deposit £100.00 into a bank, they keep around £20 of it as a "reserve", the other £80 is lent out, lets say to another Bank.

That other bank then keeps say £10 of it, and lets out the other £70 to another bank - and so on and so on.

With each step, money is in essence created out of thin air...

Quite scary when you realize that the majority of "money" out there is pretty much just cash created by the banks through their lending to each other.... thats why Governments won't risk any banks failing.. could cause the pack of cards to come crumbling down...

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