When Will The Banking Chaos End?
Author: DanGibson Total views: 14 Word Count: 491
The current chaos in the banking and finance markets is scary stuff, but we have been here before. The bad news is the last great banking collapse resulted in the Great Depression and eleven years of misery.
Stepping back to the first collapse, what do we find? Happy times! Americans were making big paper wealth gains. The market, unfortunately, corrected suddenly. The suddenness resulted in rumors of banking problems, a run occurred and the rest is history.
Once the Great Depression began, it built up momentum and steamrolled much of the world economy. For 10 to 11 years, the economic situation was beyond miserable with people losing everything and working for pennies.
The Great Depression was such a difficult period that it took dramatic measures to turn things around. The social projects put together by the government to create jobs was one. The industrial output needed for World War II was the other.
If you are getting a feeling of deja vu, you should. The current situation is similar. The biggest difference is the gains in question were stock in 1929. Today, the paper wealth gains are found in home equity. At least they were.
There is little doubt that the banking and finance industry is in a state of collapse. The loss of companies like Lehmans, Merrill Lynch, AIG, Freddie Mac and Fannie Mae is simply stunning.
Do not be confused about Merrill, AIG, Freddie Mac and Fannie Mae. They did not file for bankruptcy, but only because they were either saved by the government or snapped up for pennies on the dollar. For all intensive purposes, they failed as entities.
Before this mess, few would have known who Ben Bernanke was. Well, they should now. He is the Chairman of the Federal Reserve and the man keeping the banking industry from imploding. With his quick action, things would be much worse.
When the Great Depression hit, the Federal Reserve was not as active a player in the banking industry as it is now. To the extent it did have influence, it failed to bring home the bacon. Well, this time breakfast is being served.
The Federal Reserve has a number of roles. The biggest is to provide liquidity to the financial system. Essentially, it loans money to banks. It is the last step before government intervention. In the current crisis, the Fed and Government have put up over 900 billion dollars to keep things running.
The Fed has also shown a deft touch at flipping banks in trouble to financial institutions with stronger balance sheets. Why would anyone buy these failing banks? The Fed is guaranteeing part or all of the debts of the purchase bank. Amazing!
Unfortunately, the Federal Reserve can only do so much. All indications are we are in the early stages of the banking collapse. The Fed will try to get us through it, but there is much still to be determined.
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