It was a Bank Panic
October 5, 2008 § 17 Comments
I think people still don’t understand what Secretary Paulson was faced with a week ago Thursday.
It was a bank run.
Actually, it was a bank panic, since a bank run applies to one bank and a bank panic is when it is widespread and happens to many banks at once.
We did not have the threat of one, but one actually underway, with all that that implies: disappearing savings accounts, following the Joads west with all remaining possessions packed into the car, etc.
We have not had a bank panic like that since the Great Depression.
It was not a visible bank panic, with physical lines of people outside of physical banks. It was an invisible bank panic, with computerized lines of people and mostly institutions outside of the computer network doorways of the banks.
This bank panic was stopped by one thing, and one thing only: Secretary Paulson’s promise that (1) money market funds will be backstopped, and (2) $700 billion would be allocated to sop up all the illiquid mortgage paper clogging the system. This should work, and if it works and is left to be run well it will even be profitable, though the delays introduced by the criminally negligent House of Representatives last Monday have done irreversible damage.
So yeah, swallowing the “bailout” is a bitter pill, and it is unfair, and it sets terrible precedents, and it will be abused and misused in every conceivable way (even though run properly, with less interference by Congress rather than more, it could be profitable and could reduce the national debt), and all that. It was the worst thing to do, except for all the alternatives.
And yes, it may not be the last and final major intervention required.
What made this bank panic different from the ones during the Depression was its invisibility to everyman. You didn’t see the lines; you didn’t see the “bank tellers” involved in millions of transactions each second during that two hour period. That is a big problem with modernity: our relentless capacity to hide bad news and atrocity behind computer network cables, carefully prepared media presentations, and sanitarily marked medical waste bins.
Using the defibrillator was the easy part. Reforming our lives will be the difficult part. And if we don’t reform our lives, we’ll just end up in the emergency room again.