http://thecurrent.theatlantic.com/archives/2008/09/not-buying-it.php
What's clear is that a bunch of financial institutions have made
mistakes and lost money. What's unclear is why anyone (other than the
owners and managers) should care. People make mistakes and lose money
all the time. Restaurants fail, grocery stores fail, gas stations fail.
People pick the wrong stocks, they buy the wrong cars, and they marry
the wrong spouses without turning to the Treasury for bailouts.
So what's special about banks? According to what I keep reading,
it's that without banks, nobody can borrow, and the economy grinds to a
halt.
Well, let's think about that. Banks don't lend their own money; they
lend other people's (their depositors' and their stockholders'). Just
because the banks disappear doesn't mean the lenders will. Borrowers
will still want to borrow and lenders will still want to lend. The only
question is whether they'll be able to find each other.
That's one reason I feel squeamish about the official pronouncements
we've been getting. They tell us bank failures will make it hard to
borrow but never that bank failures will make it hard to lend. But
every borrower is paired with a lender, so it's odd to state the
problem so asymmetrically. This makes me suspect that the official
pronouncers have not entirely thought this thing through.
In the 1930s, a wave of bank failures did make it hard for borrowers
and lenders to find each other, and the consequences were drastic. But
times have changed in at least two relevant ways. First, the disaster
of the 1930s was caused not just by bank failures, but by a 30%
contraction of the money supply, which is something today's Fed can
easily prevent. Second, as any user of match.com can tell you, the
technology for finding partners has improved since then. When a firm
wants to raise capital, why can't it just sell bonds over the web? Or
issue new stock? Or approach one of the hedge funds that seem to be
swimming in cash? Or borrow abroad?
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