Why are Big Banks Freaking Out?

If you are like most Americans September 17th of this year was not anything notable. In fact, I bet you can't even remember what you did after school that day. Or more importantly, that night. Something crazy happened overnight on September 17th, something that hasn't been seen since the 2008 housing crisis.

But before we can understand what exactly happened that night, let's back track a bit. To oversimplify a very complex process, imagine that all the big investment banks every night have a dinner party. Every night, they loan each other money, usually with a 2% interest rate (which is no big deal). Now this system usually works pretty well...until it doesn't. In 2008 there was this investment bank named Lehman Brothers. They showed up to this 'dinner party' and basically were like "Hey we just sold a bunch of these really poor people some super trippy mortgages. Who wants to trade us for them in U.S. dollars?" (again, this is the most oversimplified version please don't come for my neck). And everyone else was like "No way that's not safe!" And the next day Lehman Brothers shut their door resulting in millions upon millions of dollars in deficits. So you can see why it's super important that this overnight lending not only happens, but stays sustainable.

Which is why September 17th was a very scary day. In response to an increased interest rate among these large investment banks--one which skyrocketed from 2% to 10%, the Federal Reserve gave out $53 Billion dollars in an attempt to correct the suspiciously high borrowing rates. And then the next day it was $75 billion dollars. And the day after it was another $75 billion, and yet another $75 billion the following day. And all of that money was not enough to satisfy the market demand for US dollars. In fact, some economists even theorize the Federal Reserve might have to print as much as $400 billion dollars to satisfy demand and lower the over night spending interest rates.

This all seems pretty complicated though, and probably very removed. But it isn't. Think of it this way. The more money that circulates around the world, the less it's worth. That means your $20 meal at Sweet Butter Cafe just became $25, but you don't necessarily get paid more. Ultimately, this could be nothing more than a blip due to investor uncertainty, but its worth being informed anyways.

I just thought this was a cute picture