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So What Happens To The Money?

Discussion in 'The Pub' at netrider.net.au started by Stueh, Jun 2, 2009.

  1. Right, so.

    We all know about this economic bullshit, banks crumbling, multi billion dollar companies going bankrupt, but I only have one question, what happens to the money?

    The place that has copped it worst, according to BBS radio, is Iceland. They've have several major banks just sort of dissapear overnight.

    What I want to know is, when a bank crumbles, what happens with all the money?

    There would be people who have account with any amount of money in them, $5, $5000, $500,000, does this all just dissapear because the bank has invested it and doesn't have it anymore?

    And what abotu loans, mortages? Do the people still have to pay them off? If the bank crumbles, and another bank comes in to pick up the pieces, do the people who have lost their money get it back? And if not, do they still have to pay off their loans?

    Just been bugging me for a while.



    Anyone who is more informed than me able to help? :)
     
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  2. My limited understanding is that a lot of it never existed, ie borrowing on property that devalued & the like.

    Banks are banking on people paying them back so they can pay their lenders back, (the bank only needs a small % of what they lend people to borrow against) a lot of the money was just numbers on paper, money the bank expects to come in.

    Loans that are still active will be bought out by other banks, so you still have to pay.

    That's what I think, could be wrong.
     
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  3. Gross generalisation: it evaporates.

    What has happened is that the world has come to the inevitable conclusion that the total amount of value out there is not nearly as great as it was thought to be a year ago.

    Look at it this way - last year you may have had a house valued at $500K. This year it is valued at $400K. You have 'lost' $100K, but it is in perceived value, rather than a room disappearing into thin air.

    Same with companies, only more so. The banks hold the loans that companies take out, the companies 'perceived value' collapses and the bank's investment disappears. Remember that banks also borrow to lend to their customers, and they have to pay it back. Same as the person who borrows the $500k, still has to pay it ALL back. Someone ALWAYS ends up owning the loan - it never just disappears.
     
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  4. /\ Yeah, that's what I meant to say :wink:

    & the effect is compounded by the fact that people borrow against their house worth 500K, then default/"lose" 100K, which leads to people getting scared & not buying/borrowing, which leads to further devaluation...
     
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  5. Wait, so your money can disappear, but your loan does not?

    Damn. That's gutta suck.
     
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  6. Exactly. Despite the fact that it was the banks who screwed up, they (except a very few that collapsed, and even then the individual directors came out of it very well) won't end up wearing it, we will. Be lovely if my debts had dived as much as my investments, but it just doesn't work that way.
     
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  7. Money doesn't disappear, it transfers. For all the talk about it, the money is still somewhere, just not where you want it to be.

    Iceland was a very strange case. Basically, they deregulated their banks which then lent money that they didn't have to people who were using assets that were already inflated as security.

    At one point, their banking system owed more money than their economy generated. This is ok whilst people are paying their loans. However, the debt was often financed in overseas currencies, which meant that their currency was vulnerable to attack.

    Something happened (I can't remember the trigger) that meant that the UK government froze the assets of one of the Iceland banks (using their anti-terrorist legislation believe it or not). This causes a massive confidence crisis in the Icelandic banking system which then becomes a self fulfilling prophecy. Other banks won't extend credit to the Icelandic banks, call their debts, which can't be paid. There is a run on the currency and your US$1k loan that you could easily service now becomes impossible to pay (you are still paid in Icelandic currency). So you default, but the asset used to secure the debt is now less than the debt.......

    Iceland will recover from this, it will take a little while that's all.
     
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  8. You can't win,
    You can't break even,
    You can't quit. :cry:
     
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  9. The monkeys take it.
     
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  10. But do you still own your money? Or does the title of ownership also transfer? :shock:



    But also forget trying to take YOUR money out of a bank that you think might go under, they can limit how much everyone is allowed to have of their OWN money.

    It happened here a couple of years ago here, where the bank announced that to protect itself no-one would be allowed to take more than x value out. :?
     
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  11. I've seen a monkey steal the money out of someones top pocket in Delhi. Funniest thing to watch.
     
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  12. could you declare bankruptcy?
     
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  13. That would mean surrendering any claim you had on your money, not sure what it would mean for a loan but you would have to establish that you had no money, no assets, and no income to be able to service the loan... my understanding anyway.
     
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  14. like people have already said, don't think about the loss of money as physical cash. At the end of the day most the worlds 'money' is just numbers on a computer screen.

    When they say the global economy has shrunk by XX billions. This doesn't mean that anything has been physically lost, it just means the value in which someone is willing to pay for it has fallen, therefore its worth less.

    Without trying to confuse you, most of these losses are 'non-realised' losses and only effect the people if they try to sell.

    think about it like shares, if you own 100 coles shares that you bought for $100 at the top of the boom but if you went to the share market to try and sell and you could only get $80 then you have made a loss. but if you held on to these same shares and waited for the market to return and they were worth $120 did you ever really 'loose' money.

    confused yet?

    also as far as deposit or loans with the bank go. not one person in the world has lossed a cent in deposits. if a bank has gone under, another bank/government has simply taken them over. This will be the same for the mortgages.
     
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  15. ABC 1, Thursday night at 8.30pm. There's a show on called The Ascent of Money. I think it's in 4 parts - part 1 was last week and it was excellent. Really interesting talking about the whole history of money and how we got to where we are today. Tomorrow night is all about government bonds. Well worth watching if you want to understand this stuff.
     
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  16. That was an excellent doco - well worth making time for the next one.

    (Thanks for the reminder!)

    :grin:
     
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  17. + 1

    This is a fascinating series that draws parallels to the past. :grin:
     
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  18. http://www.abc.net.au/iview/

    I just finished watching the 1st episode. Very interesting doco.
     
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  19. THIS IS NOT TRUE and is not always the case.

    In many countries failing banks limit the amount that can be withdrawn from your account.

    Failing banks are normaly bought out by goverment to some extent.

    However there are causes where banks have failed due to poor investments and lending and ordinary people have lost all or part of the money in their savings cash accounts. The cases that i know about are in eastern europe im sure there are simmilar stories worwide.
     
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  20. Are you able to give me some examples? i'm not trying to say your wrong, but i have been told by my employer that since the whole GFC started that no deposit money has been lost. So if this is not the case I would like to know so I have the right information. I'm not saying that no deposit money has been lost in the history of banking, rather just in the past few years.

    Yes your right that banks have limited the amount of withdrawals, but that does mean you wont get your money eventually.
     
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