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Banks
Topic Started: Oct 20 2008, 03:29 PM (112 Views)
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Why do banks lend money to each other? This is one of the big problems, aprrantley of the current financial crisis.
Dosn't that sound a bit like farmer lending each other eggs?
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Monkey Chow
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beep beep m beep beep yeah
Banks make money by lending money and investing deposits. If Joe businessman, wait a minute, let's call him Bob instead, goes into the bank and wants to borrow $1 Million for his payroll or to expand his business or something, that bank may not have it but will borrow it from another bank, make Bob the loan at, say, 8%, and pay the other bank, say, 4% and make money on the spread, in this example, 4%. If bank a is worried bank b will be bankrupt tomorrow, bank a will not make the loan, Bob won't get his loan, and Bob's employees may not get paid. So if the banks have confidence in each other surviving long enough to get paid back, they will loan each other money and businesses and consumers can get loans. It also effects housing, cars, and credit cards.
Everybody's got something to hide 'cept for me and my monkey.
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Bill
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Monkey Chow
Oct 20 2008, 03:35 PM
If Joe businessman, wait a minute, let's call him Bob instead....
:rofl:

Good explanation, Ron.

I think the problem comes about when Bank B sells Bob's debt as an asset to Bank C, which pays for the purchase with another loan from Bank D. This goes on for a few more years until someone says, "Hey, where's the money actually coming from?" Since nobody really remembers by that stage, market confidence goes through the floor and you've got a massive crash and bailout on your hands.
Put a puppet on it.
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Monkey Chow
Oct 20 2008, 03:35 PM
Banks make money by lending money and investing deposits. If Joe businessman, wait a minute, let's call him Bob instead, goes into the bank and wants to borrow $1 Million for his payroll or to expand his business or something, that bank may not have it but will borrow it from another bank, make Bob the loan at, say, 8%, and pay the other bank, say, 4% and make money on the spread, in this example, 4%. If bank a is worried bank b will be bankrupt tomorrow, bank a will not make the loan, Bob won't get his loan, and Bob's employees may not get paid. So if the banks have confidence in each other surviving long enough to get paid back, they will loan each other money and businesses and consumers can get loans. It also effects housing, cars, and credit cards.
What kind of bank can't afford to lend someone £1,000.000????
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Monkey Chow
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beep beep m beep beep yeah
Most of them right now. :lol: (That was just an example for a simplistic explanation.)
Everybody's got something to hide 'cept for me and my monkey.
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