Who to balme?-The HW

I think it is an interesting topic because we are always blaming the government for everything and the economic crisis is not the exception to the rule.
Regularly I hear people in the radio or in the restaurants talking about the economic crises, that the economy this and the economy that, and they always blame our government for it. But then I think, who is it responsible for it? I think that to be able to answer the question we first need to know how banks work.
We know that a bank works basically by winning the trust and confidence of people, and that if one of these is broken very bad things can occur, like for example leading us to an economic crisis. Like the example that we saw were a bank had declare that they were not going to be able to keep lending money, up to this point everything was completely fine with the bank. Later after that announcement the people started too freaked out and started to withdrawal all their money at the same time all of their money from banks. Because of this the blanks started to run out of money c cause in theory they have the money but since they invested that money the banks weren´t able to give back to all people all of their money, leading to an economic crises.
And who is it that because of one bank the rest started to fall apart? Well, because of the paranoia that the people had and because as we know banks borrow money from other banks.
Therefore I think that the ones that should be blamed is us, cause at the end we are the ones that in first place started to stop paying our mortgages and the ones that were withdrawing all the money from the banks. Maybe if banks could have predicted people’s behavior they would never had made those announcements and the money from the banks would have never been withdrawal.

Economic Crisis

I liked a lot the class we had before the holy week that was about where did the economic crisis come from; but what I really found interesting is how do banks work. Since child I had asked my family and myself how do banks work? What do they do with all that money? Do they save it? Well, maestro John, in this class, finally solved all my doubts.

Savers deposit their money in banks and banks give 90% of that money to borrowers and they can be divided in two types: Individuals (they are given the mortgages) and business, which is used for investment and in some cases they borrow money to other banks. Borrowers have to pay what they borrowed with interests; those interests are the left money that banks win and they can give little percentage it to the savers, as an extra interest, because they saved money with the bank. Borrowers can be divided into two types: low-risk, which are the ones that actually can pay those interests and the high-risk people that obviously they can’t pay these.

Then what causes bankrupt in banks is when they gave too many mortgages to high-risk people (what the bank of US did) and then something happens and they start having problems what means that people will hear that their bank is having problems and there’s the “possibility” to loose their money and they will not like that. Therefore they run to their bank and withdraw all their money, which the bank doesn’t have because the bank stayed with only 10% of the total money. Which means that if many people loose their confidence in their bank an bank run will occur, everybody will take off their money, and the bank will not have the money to pay and it will go to the people they gave the mortgages, which are mostly high-risk, who will not pay because they can’t. But the savers will still want their money so the bank will have to go to the government to ask for its help and the government will buy the bank and “return” all the savers their money.

All this is the process in which we got into the economic crisis and I really liked this class because I didn’t know the way the banks manage their money, and it’s amazing the fact that everything, of this process, is based on people’s confidence because if they had left their money in the bank; the bank will be ok and it will just had to find the way to solve its first problem.

The teacher also talked about the Northern Rock Bank, which was the first bank to have a bank run, which consists that everybody want their money back because they loose their confidence on it because thehy may think that they will loose their money.