Is Our Money Safe?

13 Pages 3196 Words

Is Our Money Safe?

Sam Vaknin's Psychology, Philosophy, Economics and Foreign Affairs Web Sites


Banks are institutions wherein miracles happen regularly. We rarely entrust our money to anyone but ourselves - and our banks. Despite a very chequered history of mismanagement, corruption, false promises and representations, delusions and behavioural inconsistency - banks still succeed to motivate us to give them our money. Partly it is the feeling that there is safety in numbers. The fashionable term today is “moral hazard”. The implicit guarantees of the state and of other financial institutions moves us to take risks which we would, otherwise, have avoided. Partly it is the sophistication of the banks in marketing and promoting themselves and their products. Glossy brochures, professional computer and video presentations and vast, shrine-like, real estate complexes all serve to enhance the image of the banks as the temples of the new religion of money.

But what is behind all this ? How can we judge the soundness of our banks ? In other words, how can we tell if our money is safely tucked away in a safe haven ?

The reflex is to go to the bank’s balance sheets. Banks and balance sheets have been both invented in their modern form in the 15th century. A balance sheet, coupled with other financial statements is supposed to provide us with a true and full picture of the health of the bank, its past and its long-term prospects. The surprising thing is that - despite common opinion - it does. The less surprising element is that it is rather useless unless you know how to read it.

Financial Statements (Income - aka Profit and Loss - Statement, Cash Flow Statement and Balance Sheet) come in many forms. Sometimes they conform to Western accounting standards (the Generally Accepted Accounting Principles, GAAP, or the less rigorous and more fuzzily worded International Accounting Standards, IAS). Otherwise, they conform to l...