Uploaded September 2016 | Updated September 2026, 2 weeks ago
Professor L. Randall Wray discussing insolvent banks. Banks are very different from other kinds of companies. Normal firms can only run until they run out of money, at which point they can't pay for things anymore. But banks are special, because they are basically the scoreboard of the monetary system: we use their IOUs as money (your bank account is actually an IOU for government cash). Just like I can write as many IOUs to you as I want, banks can continue to write IOUs for as long as people will accept them. So there is no limit where the bank runs out of money and can't buy things anymore: they can always make loans by creating more IOUs; they can always pay their employees by creating more IOUs. So what does it mean for a bank to go out of business?
Equity = Assets - Liabilities. Assets are all the things you own, and liabilities are all the things you owe. Equity is the amount of money you'd have left if you sold everything you own, and used the money to pay back everybody you owe. When a bank's equity drops below zero, this means it's insolvent: it owes people more than it has.
This doesn't actually stop the bank from operating: it's equity could keep going more and more negative as its liabilities built up or assets shrunk, as long as people keep accepting its IOUs. But these banks are heavily incentivized to take big risks: they're already underwater, so, hey, why not? Nothing to lose. This is why it's imperative that the government either take the bank over or shut it down.
See the whole video here: youtube.com/watch?v=KoBnwfokW5Q&list=PLYvSXI9SKGf2lIno6TI0r_PbLX_cpAwuu&index=8
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Professor L. Randall Wray discussing insolvent banks. Banks are very different from other kinds of companies. Normal firms can only run until they run out of money, at which point they can't pay for things anymore. But banks are special, because they are basically the scoreboard of the monetary system: we use their IOUs as money (your bank account is actually an IOU for government cash). Just like I can write as many IOUs to you as I want, banks can continue to write IOUs for as long as people will accept them. So there is no limit where the bank runs out of money and can't buy things anymore: they can always make loans by creating more IOUs; they can always pay their employees by creating more IOUs. So what does it mean for a bank to go out of business?
Equity = Assets - Liabilities. Assets are all the things you own, and liabilities are all the things you owe. Equity is the amount of money you'd have left if you sold everything you own, and used the money to pay back everybody you owe. When a bank's equity drops below zero, this means it's insolvent: it owes people more than it has.
This doesn't actually stop the bank from operating: it's equity could keep going more and more negative as its liabilities built up or assets shrunk, as long as people keep accepting its IOUs. But these banks are heavily incentivized to take big risks: they're already underwater, so, hey, why not? Nothing to lose. This is why it's imperative that the government either take the bank over or shut it down.
See the whole video here: youtube.com/watch?v=KoBnwfokW5Q&list=PLYvSXI9SKGf2lIno6TI0r_PbLX_cpAwuu&index=8
Like Deficit Owls on Facebook: facebook.com/DeficitOwls
