A 1% run on the banks
April 10, 2012 12:59 PM Subscribe
If the "top 1%" pulled their money out of the banking system and stored it in, say, a shoebox (a LARGE shoebox, I guess), would that crash the entire financial system of the country? What if only, say, Warren Buffet or Oprah pulled their money out? Would it have any effect on our banks?
The top 1% don't have their money in bank accounts, for the most part.
posted by empath at 1:01 PM on April 10, 2012 [5 favorites]
posted by empath at 1:01 PM on April 10, 2012 [5 favorites]
Well, you can't just "pull money out" from the markets. You "pull money out" by selling assets to someone. Since the top 1% have most of the investment cash, that would essentially mean selling off shares of major corporations at an enormous loss, and now they'd be owned by other people.
Relatively little of the money of the top 1% is actually in "banks" in the straightforward "I have a deposit" sense.
posted by Tomorrowful at 1:03 PM on April 10, 2012
Relatively little of the money of the top 1% is actually in "banks" in the straightforward "I have a deposit" sense.
posted by Tomorrowful at 1:03 PM on April 10, 2012
Relatively little of the money of the top 1% is actually in "banks" in the straightforward "I have a deposit" sense.
Actually I'm going to guess that's sort of wrong. They probably aren't in savings accounts sure, but def a large % of MMA balances are going to be HNW folks. What effect that getting pulled would have on bank capital I don't know. Top 1% assets wise isn't Buffett money. It's like 5 mil net worth including a house.
That said I'm not sure if that's enough to cause bank run issues for banks.
Also not so sure on what grounds a bank would sue for someone asking for their demand deposits. Of course by the same coin I don't see people filling up their home safes with greenbacks.
posted by JPD at 1:09 PM on April 10, 2012
Actually I'm going to guess that's sort of wrong. They probably aren't in savings accounts sure, but def a large % of MMA balances are going to be HNW folks. What effect that getting pulled would have on bank capital I don't know. Top 1% assets wise isn't Buffett money. It's like 5 mil net worth including a house.
That said I'm not sure if that's enough to cause bank run issues for banks.
Also not so sure on what grounds a bank would sue for someone asking for their demand deposits. Of course by the same coin I don't see people filling up their home safes with greenbacks.
posted by JPD at 1:09 PM on April 10, 2012
Also not so sure on what grounds a bank would sue for someone asking for their demand deposits.
There wouldn't be, hence the "demand" part. Emergency bank holidays could be called to prevent a run on the banks, I suppose. But that would cause panic itself.
Top 1% assets wise isn't Buffett money. It's like 5 mil net worth including a house.
Which means a lot of that wealth still exists on paper rather than in bank accounts, since so much would be tired up in real estate. The true worth of real estate is what the market will bear. If everyone was trying to sell at once, those values go down dramatically.
posted by spaltavian at 1:16 PM on April 10, 2012
There wouldn't be, hence the "demand" part. Emergency bank holidays could be called to prevent a run on the banks, I suppose. But that would cause panic itself.
Top 1% assets wise isn't Buffett money. It's like 5 mil net worth including a house.
Which means a lot of that wealth still exists on paper rather than in bank accounts, since so much would be tired up in real estate. The true worth of real estate is what the market will bear. If everyone was trying to sell at once, those values go down dramatically.
posted by spaltavian at 1:16 PM on April 10, 2012
If the "top 1%" pulled their money out of the banking system and stored it in, say, a shoebox (a LARGE shoebox, I guess), would that crash the entire financial system of the country?
No. First, as others have indicated, most of the assets of "the top 1%" aren't actually in the banking system. They're in real estate or securities. Those can't be "withdrawn," only sold. Some of this will be in money markets, sure, but most of it's going to be stocks, bonds, hedge funds, and real estate. So while a massive withdrawal might crash a hedge fund, that isn't likely to cause much in the way of collateral damage. And f*ck those guys anyway.
Second, anything that isn't in a checking account isn't subject to withdrawal at the drop of a hat. The bank actually has up to 30 days to give you your money in a savings account. That's the main difference between the two, actually.
Third, this is what the FDIC is for. If the departure of a large or group of large depositors threatened a run on a bank, the FDIC would step in to shore up the liquidity of the system. This isn't a "bail out," it's what the FDIC was designed to do.
But fourth, and most importantly, the vast, vast majority of assets currently on deposit aren't controlled by the "top 1%" in their personal capacity. They're controlled by corporations. American corporations are sitting on about $1 trillion in "cash". There's just no way the "top 1%" have anything like that on deposit. The top 20 richest Americans, combined, only have about $455 billion in total assets, the vast, vast majority of which isn't going to be cash, but real estate and securities. See point one. I'd be shocked if they had 10% of their assets in cash. So we're looking at a fraction of what corporate America has.
So, long story short, no. Because most of the "top 1%'s" wealth isn't cash, and corporate America has so danged much of it, any run they attempted to force would almost certainly be able to be prevented by the FDIC.
posted by valkyryn at 1:27 PM on April 10, 2012 [3 favorites]
No. First, as others have indicated, most of the assets of "the top 1%" aren't actually in the banking system. They're in real estate or securities. Those can't be "withdrawn," only sold. Some of this will be in money markets, sure, but most of it's going to be stocks, bonds, hedge funds, and real estate. So while a massive withdrawal might crash a hedge fund, that isn't likely to cause much in the way of collateral damage. And f*ck those guys anyway.
Second, anything that isn't in a checking account isn't subject to withdrawal at the drop of a hat. The bank actually has up to 30 days to give you your money in a savings account. That's the main difference between the two, actually.
Third, this is what the FDIC is for. If the departure of a large or group of large depositors threatened a run on a bank, the FDIC would step in to shore up the liquidity of the system. This isn't a "bail out," it's what the FDIC was designed to do.
But fourth, and most importantly, the vast, vast majority of assets currently on deposit aren't controlled by the "top 1%" in their personal capacity. They're controlled by corporations. American corporations are sitting on about $1 trillion in "cash". There's just no way the "top 1%" have anything like that on deposit. The top 20 richest Americans, combined, only have about $455 billion in total assets, the vast, vast majority of which isn't going to be cash, but real estate and securities. See point one. I'd be shocked if they had 10% of their assets in cash. So we're looking at a fraction of what corporate America has.
So, long story short, no. Because most of the "top 1%'s" wealth isn't cash, and corporate America has so danged much of it, any run they attempted to force would almost certainly be able to be prevented by the FDIC.
posted by valkyryn at 1:27 PM on April 10, 2012 [3 favorites]
They probably aren't in savings accounts sure, but def a large % of MMA balances are going to be HNW folks.
Certainly, but even money-market accounts won't even cover the majority of a typical one-percenter's net worth.
Their money is going to be in a mixture of stocks, bonds, trusts and hard assets (e.g. real estate), which will vary depending on their age (e.g. a younger person will assume more risk in stocks than bonds).
So, looping back, on the original question ... yes, there's no direct mechanism to "pull money out" in the way you're imagining.
However, if you're asking how much damage one person can do in a short amount of time, take a look at people like Jérôme Kerviel and Nick Leeson.
posted by Cool Papa Bell at 1:34 PM on April 10, 2012
Certainly, but even money-market accounts won't even cover the majority of a typical one-percenter's net worth.
Their money is going to be in a mixture of stocks, bonds, trusts and hard assets (e.g. real estate), which will vary depending on their age (e.g. a younger person will assume more risk in stocks than bonds).
So, looping back, on the original question ... yes, there's no direct mechanism to "pull money out" in the way you're imagining.
However, if you're asking how much damage one person can do in a short amount of time, take a look at people like Jérôme Kerviel and Nick Leeson.
posted by Cool Papa Bell at 1:34 PM on April 10, 2012
Warren Buffet owns (according to Wikipedia) 23% of the economic value of Berkshire Hathaway. That means he "owns" 23% of Berkshire's holdings in other companies -- so, in other words, Buffet "owns" 23% of Berkshire's stake in Coca-Cola ($14.4 billion), so...$3.3 billion in KO stock. Someone holding a fire-sale of $3.3 billion of KO would artificially depress the price. So your hypothetical seller wouldn't get full value for it. But if you believe in efficient markets, someone irrationally depressing the price of that stock would create a buying opportunity for others.
So if some individuals irrationally said "sell everything, give me whatever you can get for it in cash", an efficient market would theoretically correct itself, despite the short-term price instability it might cause. And someone like Buffet, due to the way their asset holdings are structured, might even have trouble getting a "sell everything" directive executed.
posted by QuantumMeruit at 2:03 PM on April 10, 2012
So if some individuals irrationally said "sell everything, give me whatever you can get for it in cash", an efficient market would theoretically correct itself, despite the short-term price instability it might cause. And someone like Buffet, due to the way their asset holdings are structured, might even have trouble getting a "sell everything" directive executed.
posted by QuantumMeruit at 2:03 PM on April 10, 2012
It would be a deflationary action, but it would not not be strong enough to "crash" the finance system as it could not happen quickly enough for reasons explained above. You would definitely notice it, though.
posted by michaelh at 3:42 PM on April 10, 2012
posted by michaelh at 3:42 PM on April 10, 2012
Taking in mind that it's unfeasible from a practical standpoint, if it was magically, suddenly possible, then - keeping in mind IANAEconomist, my vote? Yes.
Yes it would crash the economy.
See: http://xkcd.com/980/
Under the blue trillions section, note the 1 and a half squares that represent the bottom 50% US household net worth, or 1.47 Trillion, versus the 19.62 trillion held by the top 1%.
Bank runs have generally been triggered by far, faaaaar less.
I'd guess even the top .01% would do it. With just Oprah & Warren Buffet? Not so much. Well, WB could probably crash a bank if he had it all in one bank and pulled it out at once.
Also, I think of the stock market as controlled more by lemmings, rather than rational investors. I mean, we're talking the 'Sage of Omaha', and Berkshire Hathaway, probably the most well respected stocks, aside from his personal net worth of 40-50 billion.
So, if he pulled it out all at once? Well...
OMGWTFBBQ!@#$%!! The sky is FALLING! Stock market CRASH!
Buy gold! Or some other completely pointless antiquated commodity! Head for the hills Ma! It's raining stock brokers!
Etc.
posted by Elysum at 4:07 PM on April 10, 2012
Yes it would crash the economy.
See: http://xkcd.com/980/
Under the blue trillions section, note the 1 and a half squares that represent the bottom 50% US household net worth, or 1.47 Trillion, versus the 19.62 trillion held by the top 1%.
Bank runs have generally been triggered by far, faaaaar less.
I'd guess even the top .01% would do it. With just Oprah & Warren Buffet? Not so much. Well, WB could probably crash a bank if he had it all in one bank and pulled it out at once.
Also, I think of the stock market as controlled more by lemmings, rather than rational investors. I mean, we're talking the 'Sage of Omaha', and Berkshire Hathaway, probably the most well respected stocks, aside from his personal net worth of 40-50 billion.
So, if he pulled it out all at once? Well...
OMGWTFBBQ!@#$%!! The sky is FALLING! Stock market CRASH!
Buy gold! Or some other completely pointless antiquated commodity! Head for the hills Ma! It's raining stock brokers!
Etc.
posted by Elysum at 4:07 PM on April 10, 2012
Yes, your high net worth individuals don't just keep most of their money as cash equivalents. LOTS of it is in various federal notes and bonds, and then in local and state debt. Lots of stocks. Property and various property trusts and funds (like REITs, or whetever they are doing now). Offshore holdings.
Chances are very good too that your high rollers who have significant deposits in a bank have them in some form of certificate of deposit, which are sort of time locked. You can get your money back, but you lose a lot of the interest you've earned. So the banks know when they have CDs ready to mature and make sure to have liquid assets available should the holder want to cash it in. And I think the bank examiners have formulas for determining the health of the bank with regards to how many people hold what deposits in the bank. A bank with $1b in deposits, but with one customer holding $100m is going to be a lot less healthy than a bank with a diversified customer base and only $900m in assets. They are going to need to keep a bigger reserve in case that $100m customer goes squirrely.
posted by gjc at 6:15 PM on April 10, 2012
Chances are very good too that your high rollers who have significant deposits in a bank have them in some form of certificate of deposit, which are sort of time locked. You can get your money back, but you lose a lot of the interest you've earned. So the banks know when they have CDs ready to mature and make sure to have liquid assets available should the holder want to cash it in. And I think the bank examiners have formulas for determining the health of the bank with regards to how many people hold what deposits in the bank. A bank with $1b in deposits, but with one customer holding $100m is going to be a lot less healthy than a bank with a diversified customer base and only $900m in assets. They are going to need to keep a bigger reserve in case that $100m customer goes squirrely.
posted by gjc at 6:15 PM on April 10, 2012
Going off a 2007 Levy Institute report, the net mean worth of the top one per cent of families was $18.5 million. That report only estimates that 4.5 per cent of the top one per cent's gross assets are liquid, defined as bank deposits, money market funds, and the cash surrender value of life insurance. By making a series of horrible assumptions, we can guesstimate that the average top one per cent family has around $800k worth of deposit accounts in the US.
There were around 110 million families in the US in 2007, which means the top one per cent families have around $880 billion worth of liquid assets. There are around $8755 billion of domestic deposits in FDIC-insured institutions.
If all the complications identified above (some of these deposits will be time-limited etc.) could be overcome, that would represent removing around 10 per cent of the banking system's deposits.
As to what would happen, the most sensible thing would be for the Federal Reserve to lower the reserve requirement to prevent most banks being seized by the FDIC.
posted by kithrater at 7:34 PM on April 10, 2012 [1 favorite]
There were around 110 million families in the US in 2007, which means the top one per cent families have around $880 billion worth of liquid assets. There are around $8755 billion of domestic deposits in FDIC-insured institutions.
If all the complications identified above (some of these deposits will be time-limited etc.) could be overcome, that would represent removing around 10 per cent of the banking system's deposits.
As to what would happen, the most sensible thing would be for the Federal Reserve to lower the reserve requirement to prevent most banks being seized by the FDIC.
posted by kithrater at 7:34 PM on April 10, 2012 [1 favorite]
If it happened, the banks would go directly to the US Government with their hats in their hands. Again.
posted by tumid dahlia at 8:41 PM on April 10, 2012
posted by tumid dahlia at 8:41 PM on April 10, 2012
« Older What are some old proprietary file formats that... | Should I help out a company that treated me very... Newer »
This thread is closed to new comments.
posted by spicynuts at 1:01 PM on April 10, 2012