Bank Runs II

 

Honey in the Honeycomb

There's money in the savings bank
And I personally guarantee
If there's honey in the honeycomb
Then, Baby, there's love in me

So what is a bank?

A bank is a time machine.  It takes value that has been accumulated in the past and turns it into a stream of future values.  The problem is that it follows the laws of entropy such that the process is not reversible, while runs on banks pretend that it is reversible.  A run on the bank is an attempt to pull the accumulated value from the bank, without any acknowledgement that the value has already been converted.  You can’t do that.  As George Bailey famously explained in the run on the bank in the movie It’s a wonderful Life.

“you're thinking of this place all wrong As if I had the money back in a safe. The money's not there.  Your money's in Joe's house.

(to one of the men)

Right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?” 

When you withdraw money from a bank, the bank it actually makes that withdrawal from its reserves to prevent the  need to foreclose.   Only when the withdrawals exceed its reserves, does the bank have to think about foreclosing. Just because you don’t see the sausage being made, does not mean that it is not sausage.