Simple Rules to Simple Banking
Ok, from my meagre understanding of the banking crisis I’ve devised a simple explanation;
- If you give your money to anyone (friend, bank, broker) you’re investing it in them, set against your trust. You trust the friend/bank/broker to return the money to you when you require it. If they promise to give you a bit more for trusting them, that’s great but you should be a bit suspicious – nothing in life is free.
- So you trust this friend/bank/broker and then they decide that they’ll use the money you gave them, to lend it to someone that they trust (another friend/bank/broker) and the third party then decides to lend the money to someone else who you probably wouldn’t trust and the person you gave the original money wouldn’t trust – you can probably see where this is going here…
- That final person then decides that because it doesn’t directly affect the person that they borrowed the money from that they won’t pay it back. This then creates a ripple of responsibility down the chain until the ripple hits the first person – the friend/bank/customer.
- Multiply this over the probable 4 billion people who lend their friend money/put their money into a current account/employ a broker and there you have it – crisis!
Is this too simple? Should I have added
- The third friend decides that they’ll lend it to someone at a set rate then lend it to another at a lower rate for a short time and then pocket the difference from when they relend it to the initial agreed rate.
My point is, as soon as you relinquish control over your hard earned money, you must be prepared to have someone else mismanage it. No one looks after your money like you would, why would they, it’s not theirs. See ‘drive it like you stole it’ theory.
I think that might’ve complicated the issue.
More tomorrow on Jed’s Financial Basics.