Banks are always at the centre of large-scale economic bubbles and crisis.
This is not by chance, or induced by some shock, but by design.
In this article, I set out the key reasons why banks fail and why they will necessarily fail again.
At the end of the 1990s and early 2000s we had the dot-com and telecoms bubbles. Later on that decade we had the housing bubble. To many, these bubbles might appear as totally separate and unrelated events that had little in common other than being asset bubbles.
However, these bubbles had at least two things in common. Firstly, they popped. Secondly, there was one major player to be found at the center of it all; the banking system.
This system will also be at the very center of the next crisis since the economy comes to a halt when it fails. And fail it will. In this article I discuss why.
Why banks fail…
The banking system, with the elastic currency it supplies to the market, ensures the economy at large finds itself almost continually in a state of crisis. Domestic- and cross-border (preemptive) crises meetings, ever new regulations imposed on banks and the financial industry, bail-outs, bail-ins, and state (partial) takeovers of banks and non-banks, are all evidence of economies in a situation of more or less constant crisis.
Banks regularly run into financial problems not by some fault of the free market, by coincidence, or due to a “shock” of some sort, but by design. Fractional reserve banking is inherently unsound from the very beginning. While sound money such as gold is valuable in other uses as well and requires investments and effort to increase its supply, today’s fiat money has no intrinsic value whatsoever; its only value comes from being widely accepted as payment in transactions.
Nor do the currencies employed around the world today require any previous sacrifice for the issuance of new ones; banks and central banks can effortlessly increase its quantity with a few touches on a computer keyboard. Similarly, they can decrease its quantity just as effortlessly. This is in stark contrast to inelastic currencies which tends to increase only slowly and gradually, but never decline (e.g. money backed by precious metals).