Don't Panic!
OK, the light at the end of the tunnel may be a train, but so far it is too soon to panic about bank failures.* Mark Perry brings us this chart for perspective:
Of course, since we are in an election cycle, current problems are going to be portrayed as the worst economy since the Weimar Republic, or whatever. Perry has a lot more in the post.
Climateer:
The first rule of bank panics is:
September 12, 2008, 4:51 pm"If you're going to panic, panic early"
ErikTheRed:
Interesting chart, but it doesn't consider the size of the institutions in terms of deposits, debt held, etc. That would probably be more meaningful. It's one thing if Jim's Live Bait & Savings and Loan goes under, it's another thing if Washington Mutual does...
September 12, 2008, 6:00 pmmorganovich:
i am not so sure i would trust perry's thinking that the 2002-7 "island" of banking stability (very few failures) means that all the banks are in great shape. this tends to be how all bubbles get out of control. there is a period of very benign conditions that lulls everyone into complacency. this leads to greater risk taking, more leverage, and lessened assumptions about volatility. then, when the volatility comes, many are caught badly over extended, running the sails for a calm day in a gale. i have seen this time and time again in a career on wall street. this is no different.
i also have serious doubts about trusting the FDIC to tell us whether there are problems. it looks to me as though they have been caught asleep at the switch. they have been under charging member banks for insurance for some time. indy mac wiped out $4-8 billion of the FDIC's $53 billion fund. assume 6bn and it's 11% of the fund. if wamu goes down, it would be another hit of that magnitude.
i can certainly see why they would appeal for calm, but imagine what will happen if they wind up 50 or 75% drawn down. at what point would depositors fear that the FDIC insurance on their $100k is not going to be valid by the time it matters? keep in mind that very few banks could survive an actual run on them.
this makes the situation delicate. confidence in the system must be maintained. if it wavers, it becomes a self fulfilling prophesy. were I the FDIC, i would certainly be saying "no problem. it's just a small % of banks" but they are not terribly credible. indy was not on their worry list until right before it failed.
what they really ought to be doing is pulling together a capital contribution plan from all of their member banks. they don't need to draw it, but it needs to be there and visible so that everyone knows they CAN draw it. this will keep depositors calm. this doesn't need to go out as some big deal, just an addendum to a release along the lines of "the FDIC has $53bn in assets at present and access to another $50bn through credit arrangements with member banks in the unlikely event that it is necessary".
modern banking is an economic marvel, but it is also a confidence trick based on statistical multiplexing. it pays to remember that...
September 12, 2008, 7:04 pmClint:
I'm with Erik the Red, above.
I was astounded through the last ten or fifteen years to watch all of the banks I'd ever had accounts in slowly merge into Bank of America.
The banks that were failing circa 1990 were mostly single-branch savings and loans. If Bank of America were to go under, and default on its accounts... that would count as an imperceptible '1 bank' on that plot, but would be far worse than the entire S&L crisis.
September 12, 2008, 8:09 pmMesa Econoguy:
modern banking is an economic marvel, but it is also a confidence trick based on statistical multiplexing. it pays to remember that...
Posted by: morganovich
Dead-on, morganovich, and to confuse things more,
“A central bank is the institution that controls the supply of a country’s money. This would be a straightforward matter if it weren’t for three facts: Money is imaginary. Banking doesn’t involve money. And a central bank isn’t a bank.â€
P.J. O’Rourke, On The Wealth of Nations, p.59
September 13, 2008, 9:01 amJohn Essex:
How could this happen on G.W. Bush's watch? I am not a Bush-basher, but it appears to be a family tradition. It is interesting to note that Jeb Bush, George Bush Sr., and his son Neil Bush have all been implicated in the Savings and Loan Scandal, which cost American tax payers over $1.4 TRILLION dollars (see the chart at the top of this blog). George Bush Sr. (as then-vice president under Ronald Reagan) was the man in charge of this "de-regulation" of the S&L's. See:
http://rationalrevolution.net/war/bush_family_and_the_s.htm
Further, the spin and urgency behind the current "finanical crisis" seem to be straight out of the same playbook that demand sacrifice of our economic future and civil liberties because of "man-made global warming" and the "global terror." I.E., there is no time for debate, and nothing but a blank check will due. The difference, in this instance, is that financial markets are sensitive to perceptions, and at some critical threshold the idea of a "crisis" becomes self-fullfilling. Although I too have lost in the equities market, I support Congress taking a long, hard look at just what it is that they are signing here. We are being had, it seems, by the wizards behind the curtain-- but are too busy and worried to realize it.
September 29, 2008, 1:42 pmJohn David Galt:
I've heard your platitude about assuming stupidity rather than conspiracy, but it's possible the two have coincided here. For all our capability to think, most people seem to use their brains only to rationalize the decisions they've already made emotionally.
Whether it's by design or not, the system as it stands seems to be set up so that every person and every institution eventually goes broke -- only the big guys are shielded from the consequences and allowed to recover when it happens to them, while the rest of us are not.
In my view the only solution to this kind of problem is personal responsibility. Let's ban all corporations from offering banking, financial advice, accounting or any other financial service. Anybody you entrust with the job of conserving your life savings should not be allowed to have his *own* life savings protected by a corporate veil (as corporate boards and officers do now), if he screws up in a way that justifies a lawsuit.
Scotland in Adam Smith's time had banks that were run as limited partnerships, so don't tell me it can't be done.
September 30, 2008, 9:52 pm