Friday, April 3, 2009

This Week in Bank Failures

In a week that saw a summit meeting of 20 of the most successful countries in the world, a meeting largely occupied with the unfolding turmoil in the financial system, it became a little too obvious that various parties are trying to use the difficulties in banking to further their own political agendas.

The most egregious example of this was a Wall Street Journal piece. It started off trying to paint the demonstrators at the G-20 meeting in London as a sort of anti-capitalist movement, but that is more or less the kind of wretched excess you expect from The Wall Street Journal. The part that was over the top was when it went on to suggest that the real cause of the banking crisis, and the culprit that the demonstrators ought to be demonstrating against, is deposit insurance.

Lest anyone think The Wall Street Journal has not lost its greedy little collective mind, let me spell out where we would be around now if the deposit insurance provided by the FDIC had been done away with sometime during the recent boom. There might not be a single commercial bank able to keep its doors open consistently in the United States. There would be no more automatic teller machines. Nearly every bank branch would be abandoned, and the bank headquarters, those that were able to keep operating, would be available by appointment only, with locked doors and armed guards to keep the retail customers and reporters out. The money lost in the bank failures that occurred, which would by now have included most of the banks in the country, would have led to the bankruptcy of most of the businesses in the country. Those of us fortunate enough to still be working would either be getting paid in cash at the end of each day or would be taking a tremendous risk of never collecting their pay. The Dow Jones Industrial Average wouldn’t be hovering near 8,000 — it wouldn’t exist anymore. The Wall Street Journal, in the unlikely event that it were still in operation, would be reduced to selling its papers on the street for 25 cents a copy, as the infrastructure that currently allows it to appear on newsstands across the country would have broken down. And the “riots” it would be reporting on would not be a few hundred people trying to make as much noise as they could in London, but would include the angriest one million of the four million unemployed workers in New York City.

In short, if we didn’t have deposit insurance, the scene we would be seeing would be a cross between the Great Depression and Escape From New York. The Wall Street Journal is correct in saying that deposit insurance causes various kinds of market distortions. But the suggestion to do away with it because of that is madness, and the stridency in its prose is just another reminder of how far removed from any useful view of reality Wall Street has become.