Bank Runs for Thee, but Not for Me

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Felix Salmon makes a good point about bank nationalization: if we nationalize just some of the banks, it creates uncertainty in the markets about whether we’ll nationalize more, and about which ones; it could actually cause otherwise survivable banks to fail, because investors are afraid to buy (or hold) their stock and lose it in a nationalization.

However — and I know absolutely nothing about these things — a question comes to me in response: what if we froze the stocks of the entire banking industry?  Nobody can buy them, nobody can sell them.  Not until the gov’t has done what it needs to do to re-structure the system.

One of the things FDR did immediately upon taking office in 1933 was declare a bank “holiday.”  That is, he forced all the banks to close and remain closed until further notice.  That stopped the runs on banks, which stopped the cascading bank failures that were making an already terrible situation worse.  He allowed them to re-open after the panic had subsided and the gov’t had re-structured the banks by merging them into stronger institutions.

The two situations seem at least roughly analogous.  Isn’t what Salmon describes essentially a run on the banks?  The only difference I can see is who’s doing the running.  In FDR’s day, it was the depositors, who had just wanted a safe place to hold their savings.  Today, it’s the investors, who intentionally risked their money in exchange for a hoped-for profit.

Now, what’s the difference between a bunch of small depositors, and a bunch of Wall Street financiers?  Why might politicians treat them differently?

Hmmmm.  Let . . . me . . . think.

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6 Responses to “Bank Runs for Thee, but Not for Me”

  1. michaellasley Says:

    Is this one of them dirty jokes? Where you ask what’s the difference between one thing and another and the answer is something almost — almost! — dirty?

  2. urbino Says:

    No, no. It’s one o’ them rhetorical questions. You being a rhetorician, I expect you to pick up on these things.

  3. michaellasley Says:

    OOOOHHHHHHH!!!

    I’m a regular rhetorician. Not a political rhetorician.

  4. urbino Says:

    Here’s Simon Johnson, the former IMF economist I linked to in my last “Knights Who Say” post, making a similar point — but he’s talking from actual experience as a person who’s had to step into other countries and force them to restructure their financial systems. Whereas I’m strictly talking out of my hat.

  5. Michael Lasley Says:

    Here’s a bit more about bank nationalization from cnbc: http://www.cnbc.com/id/29259734

    “Today, the growing minority supporting this was given support by none other than Allan Greenspan, who told the FT that he supported nationalization of some banks (on a “temporary” basis, whatever that means).

    Not only that, but Republican Senators like Lindsey Graham are also floating trial balloons, saying that nationalization should at least be considered in lieu of sending billions more down a black hole.”

  6. urbino Says:

    There’s a theory going around that that’s exactly what Geithner’s going to do. He just can’t call it that, and he has to come at it in sort of a roundabout way.

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