OT - 'A Game Theory Solution for Banks to Prevent Public Panic and Bank Runs over Y2K Fears
- Part I
by Roleigh Martin
Part I:
BACKGROUND
In the August, 1998, issue of The American Spectator, John
Roberts II makes an interesting observation that
acknowledges that there is common knowledge among most
students of the Y2K threat to banks. He writes:
The Great Panic of 1999
Larry W. Martin is CEO of Data Dimensions, Inc., a
computer consulting firm which has specialized in
fixing Year 2000 problems since 1991.
"I assume you're a prudent person," he said to me
in a recent interview. "If you are, you should have
a few weeks' cash on hand in December 1999.
Maybe there won't be problems with banks or
ATMs or the utilities, but if you're prudent, you'd
like a little money on hand, wouldn't you?"
Martin paused to let this sink in while I calculated
how much cash to keep in the safe-deposit box.
Then he sprang his trap. "The problem is that if
everyone in the U.S. decides to act prudently, we'll
run out of cash. How will people react when they
go down to their bank to draw out some money
and find long lines around the corner?"
The sum of bills and coins in circulation is $586
billion--a little more than half the amount required
for the U.S. to function as a cash economy for two
weeks. Then there is the secondary economic
effect to consider. What happens when individual
small inv estors remove $1 trillion in demand
deposits from banks, IRA's, and stock portfolios?
Actually, the Federal Reserve has half-heartedly addressed
this fear recently, as reported in USA Today, 08/20/1998. In
the newspaper report, it says:
As a backup to the $460 billion in circulation, the
Fed will add $50 billion to the $150 billion in cash
reserves next year, says Clyde Farnsworth, director
of the Fed's operations and payments system.
But if fixing Y2K is more serious, the Fed has
contingency plans.
...But nobody knows how much is enough for
Y2K-related nationwide demand because no one
knows whether Y2K will be a glitch or a crisis, says
banking scholar Martin Mayer.
Another problem, not stated by Mr. Mayer, is whether or not a
banking crisis will occur significantly before that time. The
more popularly known Y2K writers on this problem are Gary
North, Ph.D. at his web site page of Y2K Banking links, Ed
and Jennifer Yourdons' chapter on Finance in their Time
Bomb 2000 book, Mark Ludwig, Ph.D. in his book, The
Millenium Bug: Gateway to the Cashless Society? and
Jim Lord in his book, A Survival Guide for the Year 2000
Problem. North, in an analysis of this late-August 1998
action of the Fed, calculates "the FED will have in reserve
$2,650 per household, assuming that none of this money will
flee the U.S., as 95% of all previous currency has."
Mr. Ludwig provides the Federal Reserve Board source
documents and a mathematical formula (see the link for the
formula) to back up his concern:
Using the above five pieces of data, you can
calculate the current bank reserve ratio, RR, which
is the amount of money banks have on hand for
their depositors, should those depositors come
calling to collect...Thus, for example, in April,
1998...if 1.1% of ba nk depositors decide that the
millenium bug is a serious enough problem to pull
their money out of the bank, the banks' doors will
close. Or if 1.1% pull their money because they
think that other people will pull their money out of
the bank because of the millenium bug (even if
they don't personally believe the technical
problem will crash banks), the banks' doors will
close.
Regardless of whether the mathematics of North and Ludwig
are correct, to most lay people who are exposed to their
arguments, their mathematics and references appear to be
correct, especially since both of them are making direct
references to official, raw sources; i.e., Federal banking
authority web site material. Both Yourdon and Lord warn
people in a similar vein. Many other Y2K writers, lesser
known, similarly advise their readers with some differences to
the degree that they advise taking precautions.
Summarizing the problem in brief. Banks are the safest place
to keep one's money when the public has confidence in
banks; when the public loses trust in the safety of banks,
keeping one's money in banks is very risky. As the Board of
Governors of the Federal Reserve System has written, "Trust,
at the consumer level, is the foundation of the banking
system. The Federal Reserve Board recognizes this
fundamental element and is taking decisive steps to provide
assurance of the system." Many, myself included, do not
think the Federal Reserve Board is taking sufficient steps.
(However, if you do want to read a professor of finance who is
a little more calming--but still concerned--about the banks'
responses, consult Dr. Reynolds Griffith's web pages, "Y2K
and the Banking System.")
The banking industry needs to adopt the age-old maxim,
"United we stand, divided we fall." Adopting a win-win game
theory perspective, while giving my keynote IQPC conference
address on the Y2K embedded systems threat in London this
last June, I advanced the following proposal to an audience
which included a Y2K lobbyist in the British banking industry,
as well as--earlier when I spoke at an Orlando SPG Y2K
conference--to a Y2K lobbyist representing small banks in
America. Both lobbyists spoke to me individually after my
conference speeches and felt there was strong merit to this
proposal.
The proposal first requires understanding the pros and cons of
three existing monetary instruments: cash, U.S Savings
Bonds and checking accounts.
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