How Banks Work
Banks operate by lending money from the savers to the borrowers. The banks place an interest rate on loans to create a profit, and prevent them from losing too much money at any given time. For the most part, the banks can make very wise decisions on whom to lend money to, but sometimes they become too lenient. The financial crisis of 2008 is an example of a problem with loaning leniency. During the early 2000s, the housing market was promising; house prices continually were rising, so banks were loaning to almost anyone. The problem with this situation was that the people who were getting approved for mortgages weren’t at all qualified financially to buy such an expensive home. In the fall of 2008, the housing market dropped dramatically. This caused homes to drop in price, which made homeowners owe more for their home than it was worth. Many homeowners were unable or unwilling to pay, which caused banks to lose money and merge with other banks. As Mark Zandi on ABC news stated, “The last time we saw so many homeowners with home values that were worth less than the amount of mortgage they owed was back in the Great Depression”.
During this time, another bank failure was the financial panic of the stock market. The stock market started to plummet like it did during the Great Depression, and investors became very worried. Andrew Ross Sorkin of ABC news stated, “… this is the time to be investing, because this is when people make money”. The Dow had dropped 18 percent, and many people were worried that the stock market was going to crash, although it didn’t. During this time, investors were trying to switch from investing in risky assets, to safe assets. As a result, the prices of the stock market decreased dramatic...
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... ways to handle these risks, like interest rates, audits, diversified portfolios, and increase the amount of securities it holds.
During the financial crisis of 2008, the Fed decided to push banks to hold more reserves so they could have financial safety. The Fed came up with a plan to pay interest on reserves so that the banks would demand more reserves and get out of the poor condition they were in. The results were successful; the more the Fed paid interest on reserves, the more banks demanded reserves. This made the banks have confidence in the safety of the business, and slowly be able to loan to other banks.
Banks operate in a variety of ways, and without them our economy could ruin. Banks play a very important role in day to day life, and every day finances. Not only do individuals use banks, but large businesses and organizations dependent on them also.
Huge technological improvements and scientific breakthroughs have paved the way for larger, more stable and profitable financial markets. Fast and easy money was to be made by playing the booming stock market - many laymen took advantage of these opportunities without having a complete understanding of what exactly they were doing. This inevitably led to the crash that sent America and the world into the Great Depression. In the movie we see the first stages of the panic that spread throughout the country. People got scared and ran to the bank to take out their life savings.
The second tool the Federal Reserve uses is the adjustment of the reserve ratio. The reserve ratio is the ratio of the required reserves the commercial bank must keep to the bank’s own outstanding checkable-deposit liabilities (Brue, 2004, p. 254). By raising and lowering the ratio, the Fed can control how much the commercial banks can lend. For example, if the Fed lowers the reserve ratio, commercial banks will now have more excess reserves allowing them to lend more money to businesses or individuals. Vice-versa, by increasing the ratio, the Fed forces the banks to lend less money due to having smaller excess reserves. If the bank is deficient in the amount of reserves it has, the bank is forced to reduce checkable deposits and, subsequently, reduce the money supply. It may also need to increase its reserves by selling bonds, which would also lower the money supply (Brue, 2004, p. 274).
It is often said that perception outweighs reality and that is often the view of the stock market. News that a certain stock may be on the rise can set off a buying spree, while a tip that one may be on decline might entice people to sell. The fact that no one really knows what is going to happen one way or the other is inconsequential. John Kenneth Galbraith uses the concept of speculation as a major theme in his book The Great Crash 1929. Galbraith’s portrayal of the market before the crash focuses largely on massive speculation of overvalued stocks which were inevitably going to topple and take the wealth of the shareholders down with it. After all, the prices could not continue to go up forever. Widespread speculation was no doubt a major player in the crash, but many other factors were in play as well. While the speculation argument has some merit, the reasons for the collapse and its lasting effects had many moving parts that cannot be explained so simply.
There is no doubt that the stock market crash contributed to the great depression, but how? One way that the Crash contributed to the depression was the loss of money it caused to the average man. It is believed that in the first day of the crash almost a billion dollars were lost, this took a large amount out of the pocket of the common man. Without this money people were unable to purchase consumer goods, which the United States economy was based on. Another way the Crash contributed to the depression was the loss of confidence in the market. When t...
The Bank of the United States is a symbol of the long held American fear of centralization and government control. The bank was an attempt to bring some stability and control and was successful at doing this. However, both times the bank was chartered, forces within the economy ultimately destroyed it. The fear of centralization and control was ultimately detrimental to the U.S. economy.
On an October morning, the United States woke up and realized that the stock market had crashed. Everyone was shocked and confused. The people lost most if not all of their possessions. The Great Depression was during the 1930s and made people do, think, and feel in many ways they hadn’t. They had to conserve what they had and most of the time it was nothing. They felt sad, scared, and confused in a different way. It wasn’t just the people it was the government, the police, the authority, and even the other neighboring countries of the United States. According to Maury Klein in Rainbow’s End she says, “Black Thursday, 1929. The market opened, said one broker, ‘Like a bolt out of hell.’ The dreaded tsunami of selling crashed down at once. Never had so many orders poured in so fast from so many places; 1.6 million shares changed hands in the first half hour alone and the pace never slowed. No sooner was a phone hung up than it rang again.” The rich became poor. The poor became poorer. The people with money were scared to share it thinking they might lose all of it. No one trusted anyone except themselves and their family. Money is the key to survival in this world. But during that time the people were poor. They didn’t have money, so how did they survive?
Banks all around, especially the large ones, sought to support the market before it could crash down. As the stock prices crashed, banks struggled to keep their doors open (“Economic Causes and Impacts”). Unfortunately, some banks were unsuccessful. Customers wanted their money out from their savings account before it was gone and out of reach, leaving banks insolvent (“Stock Market Crash of 1929”).
The stock market crash of 1929 was the primary event that led to the collapse of stability in the nation and ultimately paved the road to the Great Depression. The crash was a wide range of causes that varied throughout the prosperous times of the 1920’s. There were consumers buying on margin, too much faith in businesses and government, and most felt there were large expansions in the stock market. Because of all these positive views that the people of the American society possessed, people hardly looked at the crises in front of them.... ...
] This catastrophic event is caused by the accumulation of a large scale of speculation by not only investors but also banks and institutions in the stock market. Though the unemployment rate was climbing during the 1920s and economy was not looking good, people on Wall Street were not affected by the depressing news. The optimism spread from Wall Street to small investors and they were investing with the money they don’t have, which is investing on margin as high as 90%. When the speculative bubble burst, people lost everything including houses and pensions. The main reason ...
The monetary policies that caused the financial crisis were that the Federal bank reserves provided banks with new funds that enabled them to make loans and investments. The process led to increase in money supply which in due course increased the rate of spending (Flores, Leigh & Clements, 2009). Eventually, the increase in spending over and beyond the capacity the economy to produce goods and services led to inflation.
F. Scott Fitzgerald delineated the Roaring Twenties in The Great Gatsby as “the parties were bigger. The pace was faster, the shows were broader, the buildings were higher, the morals were looser, and the liquor was cheaper.” It was the era marked by social changes and splendous parties and self-made millionaires. However, unprecedented to Fitzgerald and many of his contemporaries was that said glamourous lifestyle was built on a precarious foundation. When the stock market crashed in 1929, it put a period to the beguiling era and opened Americans to a horrid epoch. Yet, in actuality, the Stock market crash is an inexorable consequence of a time so reckless such as the Roaring Twenties. Some identified causes of the eventual crash are margin buying, overproduction of goods, and banks investing in stocks with depositors’ funds.
Banks failed due to unpaid loans and bank runs. Just a few years after the crash, more than 5,000 banks closed.... ... middle of paper ... ... Print.
Another problem prior to the establishment of the Federal Reserve System was the inelasticity of bank credit and the supply of money. Small banks placed their excess reserves in large central reserve banks. Whenever a bank’s depositors wanted their funds, the smaller banks would be covered by the central banks. The system worked well during normal conditions. Some banks would draw down on their reserves as other banks would be building up their reserves. In times of excessive demand, however, the problem became quite serious. When the public wanted large amounts of currency, the
Identify the potential risks which affect the company and manage these risks within its risk appetite;
Banks sector is playing an important role in economies. The banking industry, as the classic and the most influential of financial intermediaries, facilitates economic operations. Financial sector in the worldwide country has been changes over these years by looking the changes of financial structure environment and economic conditions. Thus, banks are a very important point to financial system and play an important role as control and contribute growth to the economic sector.