Economic Jargon A-C
Imagine a skip on a building site where you throw in all the rubbish, well a bad bank is the financial equivalent of that. It is a state agency which acts as a financial skip where banks throw all their bad loans. This “ringfences” all the bad stuff and gives the good banks a clean balance sheet.
Bank Run/Run on the Banks
This is when a bank runs out of money. Bank runs are caused by the collapse of trust in a bank. History is full of such examples.When people get wind of a problem (or they imagine there is one), they literally “run” to take their money out. Because banks do not keep 100% of deposits on hand all the time, the withdrawal of large amounts of deposits from a bank in a short time scale can overwhelm it simply because there isn’t enough money in the safe to meet all the withdrawals all at once.
Bank guarantee scheme
This is when the State stands behind all the banks’ debts and says if the bank can’t pay these debts, it will. The citizens foot the bill. It worked very effectively in Sweden and Switzerland in the 1990s, but it has not worked well here because the banks weren’t clear about how bad their balance sheets were and the State is now overwhelmed by the huges losses in the banks.
Households and small companies apply for a loan. Governments and banks “issue bonds”, but it’s effectively the same thing, an IOU. The interest paid on the IOU is called a ‘coupon’. If a government issues a €1bn “2015 bond” at an interest rate of 5%, the agreement is that the government will pay the buyer of that bond 5% interest a year – in this case €50m – every year until 2015, and then pay back the €1bn in 2015. The overwhelming majority of government debt is never actually paid off, it is just rolled over by issuing new bonds.
If you lend money to the government or bank in return for the IOU, you are a bondholder. You are taking a risk in doing so, the risk of not being paid back, which is why you are paid a rate of interest. There are different levels of protection when the bank owes you money, from deposit-holders down to ordinary shareholders. Bondholders are more protected than shareholders but not as secure as deposit-holders.
Imagine that a financial crisis is like a flood and that you are in a five-storey building. Your chances of being paid back depend on what floor you are in the building. The senior bondholders occupy the fifth floor, so it would have to be a very severe flood for them to drown. Well, Ireland is experiencing a very severe flood!
These are the guys on the third and fourth floors. (The shareholders were the ones on the first and second floors. They got flooded a long time ago.)
Balance Sheet Recession
Where the country’s balance sheet is broken. On one side, the middle classes own property which is falling in value and on the other side they have debt which is rising in cost. In this scenario, the middle class become petrified – they start saving and postpone spending so that demand dries up, unemployment rises, tax revenues fall and the budget deficit explodes.
A market system where private enterprise controls private property ownership, private earning of profit and private bearing of losses. So when you win, you win and when you lose, you lose.
This is a fancy world for injecting enough money into a bank so that it can trade.
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This list is just the tip of the iceberg, if you come across other Economic Jargon you don’t quite understand, send it in to us and we’ll translate into real-person language!