So here were go again, another big bank facing huge loan write offs, anyone want to guess how long it will be before Bank of America or perhaps Wells Fargo will be at the Fed with cap in hand asking for a big bail out like Bear Stearns? My guess is there will be at least one more big bank headed that way, if not several more. We are always told that the consequences of letting on of these banks go under would be catastrophic - apparently because it will spark off a bank run where everyone rushes to their own bank and asks for their money. At this point people will realize that dirty little secret that banks only have 10% or thereabouts of their deposits in hand as cash and can't possibly give everyone their money. Then there is mass panic, markets crash, economies take a dump and bad times are here again. This kind of thing used to happen all the time when there was much less control about how much cash banks had to have on hand and before the government was in the business of bailing out banks.
Of course it is not actually a secret that banks don't have everyone's money - anyone who has done Economics 101 should remember that - it's quite a revelation. But then again while it is not a secret it is not someone banks, economists or the government every shout out about. They all hide behind the FDIC insurance that you'll always get your first $100,000 bank come what may (assuming your account has that insurance, not all do), even if the bank pisses it all away on a big new downtown HQ and goes belly up in the night after a particular bad binge drinking session.
But despite the alleged consequences (and no one has seen a bank run in decades) I still see this stuff as corporate welfare, because on the face of it it just encourages bankers to keep on with their bad behavior - it is exactly the wrong kind of feedback to give them and will cause the opposite of evolution in business practices. Even if Bear Stearns was sold off for a song at the end of the day someone took the benefit of that huge infusion of cash from the Fed - prior profits and many benefits from soaring stock prices were creamed off for years while they cashed in on sub-prime mortgages. Also there's a whole raft of bankers and executives who will just cruise to the next cushy job - probably taking fat payoffs from Bear Stearns at the same time. Just where is the incentive for them to do anything differently next time a chance to slash and burn our economy comes along?
Those who are continually asking for more deregulation and getting government out of everything but killing people must be crazy - or they are stinking rich and know that actually boom and bust cycles like the old times are bad for everyone except them. I mean at what time were all those vast fortunes of the Rockefellers, Stanfords, Hearst and the like made? Yes, while we had little or no banking regulation - open season on everyone's money, winner take it all time - just like the good ol' wild west!
If I had my way I'd shut these corporations down completely - revoke their charter, ban all the exec from running a corporation for a number of years and bail out *only* the investors, to their FDIC amount. People would get used to the idea they shouldn't be more than $100,000 in any one bank, there would be more banks more competition, and banks themselves would be more careful about screwing up. Then again what do I know, I'm not an economist and I don't have more than $100,000 anywhere to loose.
Perhaps it is time for people on the street to start voting about their disgust of how this is all panning out. They can do it voluntarily with their money, no need to wait for a bank run - if everyone withdrew just 10% of their cash from banks it would really send a message. Or if just 10% of people took out all of their money that would do the trick and you can pick pretty much any reasonably small demographic and mobilize them to do something. Probably just the threat of it happening would cause a panic. So this year perhaps, instead of "buy nothing day" we'd have "withdraw everything day". Now wouldn't that be interesting - I have a feeling I know which would get more publicity.
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