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September 14, 2007

Today's Housing Bubble Post - What A Bank Run Looks Like

-- by Dave Johnson

This is filed under Housing Bubble, because this is more fallout from the bubble's bursting. Here's the deal: financial institutions loan out money to people (and companies and countries, etc.) who, because of the "credit crunch," might not be able to pay it back. That means that the financial institutions might not be able to pay back the money THEY owe, including to depositors.

It's housing bubble burst time - do you know where YOUR money is?

Calculated Risk: Northern Rock Bank Run, with photos:

From Bloomberg: Northern Rock Customers Crowd London Branches, Withdraw Money
Hundreds of Northern Rock Plc customers crowded into branches in London today to pull out their savings after the mortgage-loan provider sought emergency funding from the Bank of England ...
A bank run happens when people feel that a bank might be having trouble, and realize they might not be able to get THEIR money out of the bank if they don't hurry. Everyone knows that a bank (money market, stockbroker, etc.) only keeps so much cash on hand. So they show up to withdraw their money before it is too late. It is a "run" because you have to run down to the bank to get your cash before other people get their cash. Only the first people in line are going to get their money.

In the US bank deposits up to $100,000 are insured by the government, so if the worst happens you will eventually get your money (up to $100,000) -- after all the paperwork gets done. So if you feel like running down to the bank, you don't really need to take out more than you will need to pay you bills for a few months.

Posted by Dave Johnson at September 14, 2007 9:55 AM

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I remember this because it was so terrifying. It has to have been in the thirties, and my parents and neighbors were terrified because banks were failing across the country. So of course they were running to get their money out. Our family was OK, but a lot of neighbors weren't.

Posted by: MJ [TypeKey Profile Page] at September 15, 2007 6:17 AM

The context of all this needs to be preserved. This is not George and Mary and the Building and Loan. These banks knew exactly what they were doing and made piles of money doing it. They purposely ignored fraud and then pushed the losses to the secondary market.

Posted by: Zora [TypeKey Profile Page] at September 15, 2007 8:43 AM

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