Monday, March 26, 2012

Bank Runs and Youth Runs

After we learned our lesson in the Great Depression it looked like the era of the bank run was over.  What with deposit insurance and all there were no bank runs in the developed nations for decades.  Only now, it seems, things have changed, according to economist Tyler Cowen.
The modern bank run means a rush to withdraw from money market funds, the disappearance of reliable collateral for overnight loans between banks or the sudden pulling of short-term credit to a troubled financial institution.
This "shadow" banking system, at about $15 trillion, is bigger than the formal banking system protected by deposit insurance.  Tyler Cowen goes on to worry about the danger of credit collapses and deflation, and discuss proposals by some to extend credit guarantees.  But that, he worries, would just expand the problem of moral hazard and "too big to fail."

From a macro perspective, of course, the problem is fairly simple.   The credit system needs to be small enough that its overleveraged sector can be rescued in a crisis by blending it with underleveraged actors.  That's what they did in the 1907 crash.  Wall Street brokers might have been overleveraged, but US Steel was not.  Unfortunately in the century since then the approach has been to use the entire nation's equity as a guarantee against financial panic.  That approach fails when the nation's credit comes into question in a sovereign debt default.

The basic problem is that plungers (private or public) endanger the whole system when they find themselves, in a crisis, underwater.  The plungers back in 1907 were the quasi-bank Trust Companies.  The plungers in 2008 were Fannie and Freddie and the homeowners taking out overleveraged mortgages encouraged by the politicians--and Wall Streeters along for the ride.  When you set up a system like that, designed to fail, you get what you pay for.  Sooner or later, average people realize what is happening and they head for the exits.

They talk about "extraordinary delusions and the madness of crowds" as if lordly elitists are not just as subject to "groupish" delusions as the average person.  But you wonder where else the potential for a "bank run" might lie.

You wonder if a panic might soon happen with the youth vote.  Here is Jeff Jacoby reporting on Mitt Romney.
"I don't mean to be flip with this," said Mitt Romney during a Q-and-A with students at the University of Chicago last week. "But I don't see how a young American can vote for a Democrat." He cheerfully apologized to anyone who might find such a comment "offensive," but went on to explain why he was in earnest.

The Democratic Party "is focused on providing more and more benefits to my generation, mounting trillion-dollar annual deficits my generation will never pay for," Romney said. While Democrats are perpetrating "the greatest inter-generational transfer of wealth in the history of humankind," Republicans are "consumed with the idea of getting federal spending down and creating economic growth and opportunity so we can balance our budget and stop putting these debts on you."
Yeah.  When you put it that way, you gotta wonder.  And what about student loans.  At least homeowners can get out of their mortgages by walking away from them.  But you can't walk away from a student loan.

Why do you young 'uns vote for Democrats?  Apart from the fact that you have just spent 16 years listening to unionized liberal teachers in government schools and universities?  Is it just the free sex--which isn't all that free any more?

The simple answer is, of course, that young people believed Barack Obama when he promised hope and change and the wonders of green energy.  Young people didn't realize that everything the Democratic Party stands for is a chimera.

But young people are finding out now.  And that makes you wonder whether all of a sudden there will be the political equivalent of a bank run this November as students and twentysomethings realize that they had better get out before it is too late.

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