Tuppence

The first memory I have of figuring out the financial system was while watching the movie Mary Poppins. The children's father, George Banks, works at Fidelity Fiduciary Bank, and he tries to get Michael to invest his tuppence in the bank. Michael refuses to and inadvertently causes a bank run.

In class, we haven't had much of an opportunity to discuss what panics are, or how they happen, but this clip gives us a pretty good picture of what it would look like. As Krugman explained in his book, when you put your money in a bank, the banks end up lending your money to others. They expect interest on the loan so that you get back your money and they get to make money on it. Banks do keep a fraction of the money in reserve, but not enough to give everyone their money back. A bank run says that everyone who has money in this bank asks for their deposits back at the same time, in which case could cause a bankruptcy because it runs out of cash in its supply and can't ask for the loans to be repaid immediately. Ben Bernanke states that the crash of 1929 was mostly attributed to bank runs because people were convinced that their money wasn't safe, so they pulled all their money out prematurely which caused the banks to collapse (a self fulfilling prophecy). People tend to be flighty and panicky when it comes to money, and as we've touched upon in class animal spirits is what helps drive the panics because their panic causes a domino effect. Japan and Korea are good examples of this animal spirit driven economy; during the Asian Crisis, people were pulling out from countries like Thailand, Malaysia, and Indonesia because of their weak banking system and economics uncertainty. Korea and Japan, however, had relatively stable economies that could've been untouched had it not been for western banks premature panic; they grouped all of Asia together and ended up being the cause of the Korean economics crisis. It's important to remember that no matter the perceived strength of the economy, finance is a game of chance. Things can come crashing down as quickly as they boomed, and panic will be the only response.