Bank Run in Europe; Can it Happen in the U.S.?
With the Greek financial crisis unfolding, new reports of bank runs occurring have started to pop up. Over the last year or two approximately two billion to three billion euros have been withdrawn every month and this has recently accelerated to almost one billion euros in a single day. This financial crisis though will not stop in Greece and could push the world into a global recession. I know what you’re thinking: how can a little country like Greece affect the world and push everyone into a global recession? It’s not how little an economy is, but what is occurring with it and what might happen soon to more countries.
First, looking at the financial crisis, let’s look at what happens when banks incur a run on deposits, also called a “bank run.” Banks don’t hold your deposits 100% on hand in cash. They take your money and then they lend it out or invest it. In a bank run, customers want their deposits back in cash. But not everyone can get their money back, as most of that money has been used to fund loans or investments. With this financial crisis erupting, depositors want their money back and this is causing a huge strain on the system. Now Greece itself is small, but what if this was to occur in Spain? In that instance, there would be no way for the European Central Bank (ECB) to backstop all Spanish deposits, as the number would be in the trillions of euros.
This financial crisis could certainly hit American shores. Recently, JPMorgan Chase & Co. (NYSE/JPM) announced over $2.0 billion in losses related to derivative trades placed on European debt, a figure that I think will grow substantially. That’s one thing we all have to understand: multinational corporations have their hands in pies all over the world. This means that a financial crisis in one part of the world will quickly spread to the other. With the world on the edge as it is, a global recession can certainly ensue.
Don’t forget; this bank run is for paper money. This is the problem with paper money; when banks split that money apart and multiply it many times over, this makes the system that much more fragile and exacerbates a financial crisis. The situation is so bad that Greece recently decided to tie property taxes with electricity bills. Because nobody was paying the taxes, the government thought it might attach it with electricity bills so that, if you don’t pay your taxes, your electricity will get cut.
This financial crisis will certainly affect the U.S. corporations. Even though exports to Europe are small, business activity there is large. Ask yourself this: if you were a business owner in a southern European nation, would you be expanding your business in the middle of a financial crisis? Would you be ordering new parts or new products? This financial crisis is causing a high level of business uncertainty. One of the major complaints by U.S. business owners is a lack of certainty regarding rules, regulations, and future estimates for the world economy. If the financial crisis spreads into a global recession, all of these issues will just be exacerbated. This will cause less job creation and less growth. Don’t take the bank runs in Europe lightly, as they could trigger problems that might hit U.S. shores.