Where does the money go?

[john91]

Where does the money go in a recession? for example, building societies are lending fewer mortgages and people are buying fewer cars etc, yet the banks and building societies are still trying to get us to deposit money with them, to lend to whom?
John.

[Ethel]

To pay back the monies they borrowed from other institutions; to pay interest on their savers' accounts.

[R1Geezer]

i've got it under my bed in a biscuit tin and I'm going to blow the lot on Lager this Friday.

[Cakeboy]

Half the money in the world doesn't actually exist, it's just numbers on a series of computers around the world.

For example, if all the customers of a certain bank went in and withdrew the contents of their accounts in cash, the bank would go under. At no point will it carry enough cash to pay out on the accounts it holds, they employ people to decide how much is needed on given days and they have that much available. If more is needed then they have to buy it at short notice from other banks and are charged more for it. So, if they have to pay out every penny they have deposited with them it would cause a run on the bank and they'd probably go under or at the very least lose a huge amount of money.

That's a very simplified view of the banking system taken from what I can remember from doing my economics degree a few years back

[vehelpfulguy]

Money that WE (the public) invest with banks and building societies is then invested by THEM to earn ever more interest.

For example banks lend money to other banks overnight, or for short periods, and earn more interest from that than they pay to you and I.

Also during a recession more people default on their mortgages or loans, which costs the banks money.

The banks "write off" millions of pounds a year in loans that are never paid back, either through the person going bankrupt, or cannot afford the mortgage, or through fraud and so on.

They need us to keep investing with them to cover for the money they have lost through loans not paid back.

In fact some banks, like Northern Rock (and a few in the USA) have lent so much money to people who have then defaulted on the loan (like mortgages) that it can cause the bank to "go under", or at least write off millions or even billions in bad debts.

They need money coming in to cover for that.

[john91]

Thanks for your answers, sounds complicated, for R I Geeezer, have you checked under the bed lately? could be some of that money that doesn't actuall exist.
John

[Peter Pedant]

Read J K Galbraith Money - where does it come from, where does it go.

IN a recession it just seems to go away (be destroyed)
The current baking crisis for Lehman for example (went bankrupt so we know it had no money)
Suppose you give a dosser 100 000 bucks to buy his house and he doesnt have a hope in paying it back. The buyer gets 100 000 and yo are left with a mortgage of 100 000 on which the bank should make money and also the land price . BUT the mortgage is defaulted. so not only are you not gonna get the money but also earn nothing in interest. Then if the auction price falls to 40 000 bucks - then someone has lost 60 000 - or more - its gone away.

Lehman was also screwed in that valuing assets is now current year and not historical. SO the house on their books would have a book value of 40 000 and not 100 000.
so even if they didnt sell the house, the books would still show they were bankrupt

You can see it is not surprising Lehamn went dooooiiing!
The surprsing thing it didnt happen sooner