Economists fear that there is a Global economic collapse brewing as there has been a lot of factors that could work together to produce a global domino effect. Suppose a foreign nation, or a number of large corporations, defaults. One or two major banks could go bankrupt. This, in turn, could frighten depositors in other banks, who might start a frenzy of bank withdrawals. Since banks keep only a moderate amount of cash on hand, there could be a massive liquidity crisis. Bankers would be desperate for cash. This chain reaction could expand into a global economic collapse!
Bankers nevertheless say that Global economic collapse is highly unlikely. A former chairman of the Chase Manhattan Bank claimed in a recent interview that the banking system "is very sound." True, "banks do a lot of business with one another, so there is tremendous interdependence." But he felt it "most unlikely" that such a Global economic collapse would pull down the world banking system. Since the success of the banking system rests on public confidence, however, it is understandable that banking leaders speak so optimistically.
'But surely a nation would not allow its major banks to fail,' you might say. But that is exactly what the central Bank of Italy did! In 1982, the collapse of the Banco Ambrosiano received much publicity because of its close connection with the Vatican. When the scandal-ridden bank failed, the Bank of Italy, to the surprise and consternation of European bankers, withdrew its support. Bankers fear this may have set a dangerous precedent to future Global economic collapse situation down the track.
Though many claims that this state is unlikely to happen, one must always be prepared for worst.