Have you ever been robbed? Didi somebody ever come to you on the street, maybe late at night, grabbed your bag and ran away? Let us hope that that never happened, but imagine that it did. How much money do you think you would have lost? Probably 50$, maybe 100$? Plus you lost all your credit cards, your ID and your drivers’ license.
That is quite a lot of money, but compare the amount of money you have in your wallet with the amount of money that you keep in your bank. You have much more money in your bank, right? Additionally, the money you put aside for your pension is in the bank.
If somebody steals all your savings that does not occur as the robbery on the sidewalk of a street late at night. It may even happen without you knowing at first. In 2007/08 many people suddenly realized that the money they had put in their bank and saving accounts was not there anymore. Other people realized that the money they had invested in financial certificates with the grading for highest safety was gone as well because these certificates were worth absolutely nothing.
Therefore, the questions arises: what happens to our money when we put it into our bank account? If we put money in our deposit account, it should be quite safe. If we put the money in a current account that is a sight deposit, that means that any point we can go to the bank offices and ask for our money back. If we put our money in our saving accounts, that is a time deposit, which means that our bank may take up to a few days or weeks to return the money to our current account.
But what does the bank do with our money? Technically they are not allowed to invest the money from our deposit accounts but, by shifting around the money a little bit inside the bank, it actually does end up being invested.
The problem for the banks is now that they want to invest money, but they can’t because then they wouldn’t have the necessary money to give back to someone in case they ask for their deposits.
The compromise is to keep a certain ratio of money in reserves. This money would then be paid to the people who ask back their deposits. The rest of the money could be invested in order to gain profits.
We have two problems though. What if all customers at the same time go to their banks and ask for their money back? The bank might not hold enough reserves in order to pay all of the money back. A so-called “bank run” can therefore be a massive problem for the bank because they cannot pay everyone back immediately and have to wait until their investments pay off.
The second problem is that banks can miscalculate and encourage losses with their investments. People keeping investing and trading: we are back in 2008. In the end, bankers were trading with bank certificates that represented a certain share of debt, which nobody could pay back anymore. Once people started realizing what was going on, they had already sold their shares of certificates and the prices kept falling.
Over this people lost their pensions, their houses and all of their savings. Much more than the couple of 100s that you lose when you get robbed on a street corner.
However, if you get robbed on the corner of a street you can at least give the police a description and they can catch him, potentially. Then you can suit him, potentially.
Who do you suit when the banks are gambling away your money? Is that a crime which the bankers can be punished for?
Some people say no, some people say yes. In most countries the governments jumped in and ensured people that they would get back at least parts of their savings. The banks were nationalized and today, 10 years after the crisis, we are back where we were a decade ago just waiting for the next crisis to hit.
Some more radical options are to admit freely that this was a risk the bankers took in 2008 that could have been predicted. It is their area of expertise and they should have been aware that they were doing shady deals with the certificates.
That is precisely what happened in Iceland. They jailed 26 bankers and members of financial institutions after the crisis in 2008 for a combined sentence of over 70 years. Some more bankers were suit on financial grounds to pay back part of the debt themselves. The government here did not jump in. The crisis hit therefore much harder than in other countries and people could have criticized the government and its decision harshly.
If we look at Iceland today, though, we see that it was recently declared the happiest place on Earth. The economy not only has recovered, but runs much smoother than it used to. The people has trust and confidence in the government and, now, also in the financial system. The latter, in particular, is something we cannot really say about many other countries.
More restrictions have been placed in every country after the 2008 crisis, Iceland did so as well, but it also sent out a strong statement at the same time.
That statement was built on two levels; on the one hand, the government was not going to do a bailout for the bankers. On the other hand it, showed that taking risks with other people’s’ money is a crime that one can be held responsible for.
If we would say that time will tell which of the two different ways is the better, the government bailout or the imprisonment of bankers, we can now, after one decade, see that Iceland is doing great as an economy, as a society and as a nation, whereas many other countries are plagued by the fear of losing their savings in an economic crisis, without the possibility of getting it back.
Nevertheless, we need the financial system. It is a highly complex organism which helps consumers to satisfy their needs. However, the past should have taught us that it is something that needs to be controlled in order to guarantee that people are who we are working for.