Jun 122012

Money and Banks

Spain will be getting a bailout package up to €100 billion from the Euro zone.  The idea of injecting this new money into the system is to help stabilize the banks and the economy. It sounds like a good idea on paper. Below is a funny comic I found showing the effects of lending money to an indebted economy.

source: via 9gag.com

But the reality of bailouts are more complicated and sometimes bring more bad news than good news. In the comic strip above the net debt everyone owes is zero. But in reality Greece, Ireland, Portugal, and now Spain all have a negative net worth. Instead of “he owes me and I owe her,” the situation in these countries is more like “we all owe the bank.” But the banks are sitting on mountains of debt as well from bad real estate loans, similar to what happened in the US.

Also, money is not free. So unlike the comic, when Spain takes on a bailout package it has to pay interest on it. Normally if a person was in a lot of debt, the best thing to do is cut discretionary spending, find ways to make more money, and save, not borrow even more money. But Spain is doing the opposite of that, taking on up to €100 billion ($125 billion) of more debt with no plans to cut its own spending. This is why stock markets have reacted negatively to this news. Bailouts are temporary solutions to a long-term problem. But to have a sustainable economy everyone has to pull their own weight.


Random Useless Fact:

Men’s shirts have the buttons on the right side, while women’s shirts have them on the left.