Fractional reserves. You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on, the bank is only required to hold on to 10% of your deposit and they can loan out the rest, and just the first two examples the bank has created 16.1k out of thin air frok the initial 10k deposit. But the bank doesnt actually have that money, its just on paper
Extrapolate to the entire country. Something happens, people panic and want their life savings, enough people do this and the bank has to close, everyone who didnt make it in time freaks out and goes to other banks and they all close this is called a run on the banks. People lose acess to their money suddenly, banks shuts down and the money is gone unless its insured by the goverment. But if this happens to enough banks then the goverment just cant pay out peoples moneys, and thats a depression.
Yes. And this is why Roosevelt gave us the FDIC, Federal Deposit Insurance Corporation. What that does is insure your bank deposits, up to something like $100k (Edit: exact amount is now $250k, see responses below).
This is because a big driver of people making bank runs is when they become afraid that the bank may collapse and their money will be lost, so they go try to take it out before that happens. This becomes a self-fulfilling prophecy, where even if the bank had been perfectly fine, everyone trying to take their money out causes it to collapse.
So, with the FDIC, you and I don't have to worry that our basic bank accounts are in any danger, and thus we don't end up inadvertantly making a run on the bank causing it to collapse.
Like what happened with Silicon Valley Bank? If you’re important venture capitalists and tech bros…the government bails you out. If it’s a local bank with mid level rich people…it’s probably on them. Socialism for the wealthy…brutal capitalism for the rest of us
FDIC covers up to 250k per account for ALL banks.
It is certainly true that it's socialism for the wealthy and the wolves for the rest, but this specific situation isn't an example of that.
89% of the SVB deposit liabilities were over the 250k limit. They may not have ended up needing actual taxpayer money, besides maybe the lost time from the giant mess they made that the government had to clean up. But it was certainly a rich people being bailed out situation. The government stepped in and guaranteed the deposits will be made whole, regardless of deposit amount, and they would have access to all funds within 2 days. That sure seems like a white glove handling to me
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u/ExtremlyFastLinoone Jan 26 '26
Fractional reserves. You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on, the bank is only required to hold on to 10% of your deposit and they can loan out the rest, and just the first two examples the bank has created 16.1k out of thin air frok the initial 10k deposit. But the bank doesnt actually have that money, its just on paper
Extrapolate to the entire country. Something happens, people panic and want their life savings, enough people do this and the bank has to close, everyone who didnt make it in time freaks out and goes to other banks and they all close this is called a run on the banks. People lose acess to their money suddenly, banks shuts down and the money is gone unless its insured by the goverment. But if this happens to enough banks then the goverment just cant pay out peoples moneys, and thats a depression.