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March 18, 2008
The roof, the roof, the roof is on fire!
Krugman describes two kinds of bank runs:
In some cases, the bank run is a pure self-fulfilling prophecy: the bank is "fundamentally sound," but a panic by depositors forces a too-hasty liquidation of its assets, and it goes bust. It's as if someone calls "fire!" in a crowded theater, provoking a stampede that kills many people, even though there wasn't actually a fire.In other cases, the bank is fundamentally unsound - but the bank run magnifies its losses. It's as if someone calls "Fire!" in a crowded theater, and there really is a fire - but the stampede kills people who would have survived an orderly evacuation.
We're in the second case. The Fed has spent the last 7 months trying to assure people that there isn't any fire. But there is.
Suddenly everybody in the economics profession is funny. Here is some satire from EPI's Jared Bernstein.
"In a surprise move aimed at stimulating moribund financial markets and the larger economy, the Federal Reserve surprised markets with an unprecedented 50 point rate cut, taking their target rate down to -47%...Wall St, however, was critical, continuing to press the Fed to go further. "While a negative interest rate of this size will help, the 50 point cut was far too small to make up for the losses we've suffered. Most folks down here were expecting a 75 point cut, " noted Joe Whiner, a trader at Boom'n'Bust investment bank. Whiner pointed out that while his trades lost his firm "only $32 billion" last year, his bonuses have only amounted to $30 billion. "I'm still waiting for the Fed makes up the difference," he said."
Posted by Price at March 18, 2008 05:00 PM