Human Imperfection, Teboho Kibe [read a book .txt] 📗

please shift our attention and try to encompass the sphere of human imperfection as seen in the business world. The phrase “as good as money in the bank” once meant that the investment or possession was considered to be very safe. This comparison was made because banks were regarded as very safe places to put money.

But times have changed. Today many people are not so sure about the safety of the money they have in banks. And there is good reason to feel that way. The financial experts are not so sure either.

The Wall Street Journal declared in a headline: “Fears About Stability of the Banking System in West Are Spreading.” It noted that many banks in the Western industrial nations are in trouble. Their financial position has deteriorated. An increasing number of economists feel that the banks are in worse shape now than at any time since the Great Depression that began in 1929.

Recent bank failures have been a shock. In October 1974 the Franklin National Bank in New York was declared insolvent. It had been the nation’s twentieth-largest bank, the largest to collapse in the history of the United States. Several others closed during the year. In Germany four banks failed, including the largest private bank, I. D. Herstatt. Some other European banks closed, while still others announced huge losses. And a growing number of banks were stretched to the limit of their resources.

These problems brought to mind the grim days of the Depression. At that time banks all over the world failed. In the United States about half the banks closed, 4,000 in 1933 alone. Most never reopened.

Could such a thing happen again? Are the banks heading for another catastrophe? Just how safe are they now?

Growing Anxiety

Banks are directly connected with overall economic conditions. So they reflect the health of the economy and the direction it is taking.

All indicators show that the world’s economies, especially those of the Western world and Japan, are in a very serious state. Never have so many countries had such economic difficulties at the same time.

French president Valéry Giscard d’Estaing summed up the feelings of many. He warned that the world was in the grip of a general economic crisis and that “all the curves are leading us to catastrophe.” Country after country has been hit with rampant inflation, money shortages, declining real income of workers, persistent unemployment and poverty.

The seeds for this condition were sown decades ago. But the situation was made much worse by the recent fourfold rise in oil prices. Now nearly every oil-importing nation has been going deeply into debt to try to pay its staggering oil bills.

Thus, after several European banks closed and others, including a Swiss bank, suffered sharp losses, The Wall Street Journal said: “The system is sick.” It added:

“Not even the highly vaunted Swiss banking system is immune. So is anything really safe today? . . .

“There never has been a time when so many imponderables hung over markets and over those elements which control actions of markets. . . .

“When even the biggest Swiss bank is clipped in a foreign exchange deal, then one might well ask: What’s the world coming to? Pessimists already are answering the question.”

Why Are Banks Troubled?

Why are so many banks troubled? Why have some of the largest failed? For much the same reason that any business or individual fails financially. That happens when expenses grow faster than income; and when it continues too long, bankruptcy ensues.

Bank expenses include such things as the interest paid out to depositors, the salaries and benefits to employees, and the cost of operating buildings. But some banks have lately added another growing cost: they have relied more on borrowing money themselves so that they could loan it out to others. But the cost (in interest payments) to the bank borrowing such money is usually high.

During 1974, in a period of recession, banks were hurt in other ways. Some made too many high-risk loans. When borrowers could not pay the loans back as scheduled, or at all, due to bad business conditions, the banks incurred losses. Also, banks that had money invested in such things as stocks and bonds suffered when these lost value. And some banks lost very heavily by speculating, and guessing wrong, on foreign money markets, where the exchange rates of currencies fluctuate in relation to one another.

During the year some banks were additionally hurt by withdrawal of money by depositors. Out of fear, or to invest in other areas that brought greater returns, money was pulled out of some banks in substantial quantities. This meant that the bank did not have that money to loan out to make a profit, and income suffered.

Hence, for a variety of reasons, bank expenses have mounted. But in too many cases income has not kept pace. Resources were stretched thin. And for some banks it stretched too far, like a balloon that has been inflated too much and bursts.

The startling bank problems during 1974 have officials worried. Among the things that concern them is how so many authorities could have been caught unawares. Business Week noted: “Now there are the recriminations and the questions about how not only the banks but also the banking regulators could have made so many wrong guesses over the past 10 years.” This business publication further commented:

“Taken as a whole, the [U.S. banking] system is in more trouble today than at any time since the 1930s, with a distressing number of banks over-loaned, over-borrowed, over-diversified, and undercapitalized. . . .

“There may very well be an unprecedented wave of bank mergers and consolidations as weaker fish seek shelter, and there almost certainly will be some failures.”

Basic Cause

Why all this economic instability? There are various factors, of course. But of all the answers, one stands out above the others. It is repeated by economists over and over again as being a main cause of the problems: too much debt!

For decades now, people, businesses and governments have been living far beyond their incomes. They have been borrowing more and more money to finance their affairs. Their desires have grown faster than their ability to pay. To make up the difference they have resorted to ever-increasing amounts of debt.

But sooner or later the time comes for debts to be paid off. If income does not rise enough, debts cannot be paid. And if more money cannot be borrowed because of becoming a bad credit risk, then failure or bankruptcy follows. That is what is taking place now to a growing number of individuals, businesses, and even banks. In the book The Coming Credit Collapse, investment adviser Alexander Paris writes:

“There does indeed exist a single fundamental cause of all the financial ills. They may all be traced to a long trend of excessive credit [debt] growth, which is rapidly approaching its final phase. . . .

“Over the entire postwar period [since 1945], the amount of credit outstanding has grown at a rate that, on the average, has consistently been two to three times faster than the growth in the nation’s ability to produce goods and services. Moreover, the rate has been accelerating in recent years. . . .

“This trend in credit has resulted in a growth in demand that has been highly artificial and, through its primary and secondary effects, has been responsible for most of the economic and financial problems facing the investor today.”

Business Week also singled out this basic cause, saying:

“The United States, like the world around it, is in sad shape today. Having borrowed too much in the expectation of perpetual plenty, Americans are desperate for answers to questions for which there are no pat answers. . . .

“The world’s great economies were running out of control long before [the huge price rise in oil] . . . and all that the oil situation has done is to hasten an inevitable day of reckoning.”

Extent of Debts

The extent of debt has become truly staggering. During 1974 the debt in the United States reached over two and a half trillion dollars! That is more than the total value of goods and services produced in an entire year. Of that debt, corporations owe about one trillion dollars, the federal government about $500 billion, state and local governments about $200 billion, consumers about $200 billion, and the mortgage debt was about $600 billion.

Now corporate debt amounts to more than fifteen times after-tax profits, about double what it was in 1955. Household debt is about 93 percent of income left over after other basic expenses are paid, a huge increase in recent years. And the mount of money available in the entire country is only a small fraction of the total debt.

The world’s debt is estimated to be far over $20 trillion. It is not likely that it will ever be paid back. The debt psychology has permeated every corner of the economy. The Western world is so geared to debt that living within current income would wreck it as easily as would continued inflation. Why so?

If borrowing were cut back to pay current bills, people would not buy as much, nor would businesses or governments. Production would have to be cut back drastically. Masses of people would be thrown out of work. The industrial way of life, which has concentrated so many people off the land and into cities, could not absorb such shocks.

The “prosperity” of the Western nations has been built on borrowed money. It has not been genuine. Now the bills are coming due and cannot be paid. And that is an aspect of the problem that frightens leaders. So many people, businesses and governments are near bankruptcy that even a small number of them failing could start a chain reaction that would bring the Western world’s economy to its knees. The New York Times observed: “The impact of a staggering increase in oil prices on top of already soaring inflation and rising deficits in payments abroad has sent governments reeling everywhere.”

How Banks Would Be Affected

With debt at such an all-time high, major defaults could wreck the banking system. Business Week noted that “corporations are sick—and they are sick largely as a result of their overdependence on debt.” Consumers are also “sick,” as are most governments—due to debt.

Every bank lives with the knowledge that if a few major customers that have borrowed money cannot pay it back, the bank can be in deep trouble. If, due to economic difficulties, many businesses and individuals default on their payments, there is no way that any government can make up the difference, since most governments are also deeply in debt, much of it owed to banks!

For instance, during 1974 a U.S. federal agency, the FDIC (Federal Deposit Insurance Corporation) insured individual bank deposits up to $20,000, then later in the year raised this to $40,000. But this agency had only about $5 1⁄2 billion in its reserve, while the deposits it “insured” were nearly $470 billion! Obviously, the closing of even a small number of banks would bankrupt this insurance agency.

Yet banks themselves are much to blame for their present condition. Investment adviser Alexander Paris states: “The banking system has been a willing partner in the long postwar financial deterioration that has occurred in the United States and the world.” He observes that the financial health of the banking system “by all measures, has deteriorated steadily throughout the entire postwar period, and all former limits of propriety have been far exceeded in the pursuit of profit maximization.”

The Coming Collapse

Does this mean that the banks will soon collapse? Authorities point out that there is much that governments can do to prevent this, for a while. No doubt some measures will help, temporarily.

It is suggested that governments can pump more money into the banking system. But that creates more debt, and furthers inflation. It only postpones the day of reckoning and makes the final reckoning more severe. As one financial expert stated: “This cannot be the cure. It is analogous to giving a drunk a drink to sober him up.”

There are many people who say that authorities will simply not allow a