The truth finally exposed!! How Banks Control the Economy

 For most people, banks are the safest places to store extra cash and get loans. While this is true, banks don’t hoard all the cash in the banking halls. They lend approximately 90% of the cash deposited and remain with 10%in order to meet the minimum liquidity requirements. This empowers the economy as it allows businesses and families to invest in the future. They don’t have to save up to achieve their financial goals. This makes banking one of the biggest drivers of any economy.

Banking Crisis

However, banks sometimes get caught up with lack of cash especially when people are making massive withdrawals or failing to repay their loans. In order to survive, banks rely with the central banks that often bail them out; a process referred to as discount window.If the effect happens across the banking sector, it causes a banking crisis; a condition where major banks run out of cash. This means that consumers can not access their money nor access loan facilities from banks. As a result the economy shrinks. People and firms have less money to finance their investments. This leads to an economic recession.

 

Impact of a banking crisis

As a result of this banking crisis millions of citizens lose their jobs. People become risk averse and save their money instead of spending it. This leads to a decline in investments. This creates a multiplier effect that trickles down to low levels of economic growth. Consumer confidence fades, trade declines, inflation of prices goes up, the list is endless. As a last result, the world bank may lend money at a lower interest to the government to boost its economy back to position. That is how banks control the economy. They are the heartbeat of any economy. A small flaw in the sector would lead to an economic crush down.