By Daniel Fisher
I wrote this for the
Gold-Eagle Web Magazine.
With only months remaining before D-Day arrives, the critical issue must be raised; when and how will the banking system be paralyzed as a result of Y2K? Take note how the previous is worded. The question is not "if," or "maybe," but when. Indeed this seems to be the easiest Y2K event to predict: the shut down of the banking system.
At some point later this year we should see a situation where demand for currency will significantly exceed supply. Our economy operates under a means of payment called a fractional reserve banking system. Whenever a deposit is made, almost all of it is lent out to a borrower as a loan that is turn paid back in installment payments over a period of time. The depositor is then told a lie; that he can get all his money out anytime on demand.
Reserve requirements in the U.S. today are around 6-12%. On the surface this may seem like a comfortable range for normal banking operations--and it is! But wait. In reality actual cash reserves sitting in vaults and spare currency in Federal Reserve holdings is much lower. These numbers are between 1.5-2.75% of total deposit obligations. Therefore the system relies on universal public and depositor confidence and faith they will have access to their savings, as it would take a mere 5% (or less) to deplete all reserves.
When banks fail, the FDIC steps in and cover failing accounts for up to $100,000. However, it cannot at any one time bail-out large numbers of banks simultaneously . This is because it only holds approximately 1.5% in total deposit obligations. As a result, the FDIC can realistically insure a very small minority if a serious financial crisis were to emerge.
So how then can we be so sure our financial system will be in crisis within the coming year? The global financial network has been heavily computerized in recent times. Most of these computers by their very design have the Y2K bug built in. If the system is to remain intact, virtually all computers in this interdependent wire system must be repaired or near full compliance. Anything less than 99% accuracy in routine calculations in this digitized network creates debilitating, cumulative errors that eventually overwhelm--then halt the flow and processing of data. This is the problem of imported data between interfaces and can be likened to the way a virus can propagate.
There comes a time when propagation of bugs in the system become so pervasive that the flow of money/funds/data no longer be processed, as the time expended to hand check for corrupted data exceeds the capacity and ability to do so in a manual fashion. There is no way other than computers to efficiently handle this volume of transactions.
The velocity of money would be drastically reduced--if not halted. The modern division of labor would collapse without this constant transfer of information. This means that even if 70, or 80, or even 90% of U.S. banks managed to get 100% compliant before 2000, the seeming minority who fail would mess up the compliancy of the whole system. Then we must deal with non-compliant foriegn banks. Since this is an international system, the failure of off-shore financial institutions threatens the functioning of domestic banks.
That being said, we have a legitimate concern that ATM's and other transactions will suffer severe disruptions in the weeks and months following Jan 1,2000. This would necessitate the prudent action of withdrawing (or refusing to deposit) a "month or two" of cash from the bank. At least that is what any reasonable person would conclude.
There are 103, 000,000 households in the U.S. The average monthly earnings are around $3,000 per head of household. For the sake of argument let's conservative and say that the average worker (139 million) will have $1,000 cash on hand (which takes into account the fact that some have none and some have much more) This would be $139 billion. Let's say that households take out an average of 15% of their bank accounts to be safe. This would be another $50 billion. Now let's say that 25% of small businesses plan to have two weeks cash to ensure payroll for employees. That's another $31 billion. Let's say that businesses, out of concern for their investments, withdraw an average of 5% of their deposits (Business deposits total $3.1 trillion). That's another $155 billion.
Now let's add it all up.
$139 B
+$ 50 B
+$ 31 B
+$ 155 B
************
A Total of $ 375 billion in cash will be demanded.This doesn't sound too bad does it? What if these numbers are doubled? $ 750 billion. So this begs the question: Is there enough currency to meet this demand? Fact: Existing bank reserves are $49.4 billion. The Federal reserve has promised to have an extra $200 billion specifically for Y2K. Adding these two figures we have a total of $249 billion that the banks will have available. This would not only drain ALL reserves, but banks would be short -$125 billion!! There would be no more cash left.
But wait..it gets worse.The above are based on very reasonable assumptions and disregards real-life human reaction. If such a small amount of withdraws could wreak so much havoc, what will be the general public's reaction be when the panic begins? At some point in the midst of a crisis, infamously known as a bank run, sentiment will change in a dramatic fashion. As the lines get longer it eventually becomes "Give me it all please."
Recall the 5% rule: the approximate percentage of depositors required to shut down the financial system if they were to behave in this manner. There have been many recent polls indicating something quite alarming. The percentage polled who intend to withdraw ALL of their cash before 2000 ranges from 16-31%. Those who say "most" is even higher at 30-47%.
From these numbers it can be concluded that there will indeed be a point only months away when a freeze on the bank accounts takes place, limiting withdraws. What is yet unclear is the precise date it will occur, or the manner in which it is executed.
Presumably bankers and those in authority know the day of reckoning is quickly approaching and they are shaking in their boots. There is currently a well orchestrated anti-bank run campaign underway, but this may only succeed in forestalling the inevitable .
Such efforts typically involve attepts to downplay the magnitude of Y2K or give happy-spinned reports about how hard they're working on it. They will publicly compare Y2K to a storm that lasts a couple days. Anyone who says anything more than this status quo will be labeled an "enemy of the people" or a "doomsayer," etc. This is part of the ongoing blame-game directed at those seeking the truth to which the author un-apologetically attempts to find.
In the case of the fractional reserve banking system a lie has been told for too long. A lie that must soon be painfully revealed.
It's unfortunate, but the truth hurts...