Hope he didn’t get into too much trouble. :-)
First, a caveat, I am far from a financial expert, so I may have some of this wrong, if so, please set me straight.
The cable news shows didn’t do a good job of covering the Fed’s bailout of Bear Stearns, and as a result there’s a misunderstanding about whether it’s good or bad. It is, imho, an unqualified good thing because it saved us from a run on the banks, something we haven’t seen since the Great Depression of the 1930s.
First to be clear, a run had already started. That’s what was going on with Bear Stearns.
A run is a form of panic. You hear a rumor that your bank is in trouble, so you go down to the bank to withdraw all your savings. You tell a few of your friends, and they tell a few, and all of a sudden the bank’s reserve is gone (banks don’t keep all your money, they lend most of it out, that’s how they make money). Meanwhile one of your neighbors who keeps her savings at a different bank gets the idea that her money might not be safe, so she goes to withdraw all her money, tells her friends and so on, and eventually their reserve is depleted and they have to refuse requests for withdrawals.
A bank run a viral thing, and once one gets going, there’s no way to stop it. But the US govt did do something to prevent runs, with the FDIC, a government entity that insures deposits. This really did prevent runs, we haven’t had one since.
Now here comes a new form of bank, offering better returns than the insured bank accounts, people feel safe putting their money there, but they are not insured. Like Bear Stearns, where a run started on March 11 of this year, putting the Fed in a difficult position, stop it, by backing the accounts, or let it run. Thankfully they did the right thing, and stopped it. Why? Because if they hadn’t, every one with a savings account at any brokerage firm might have lost his or her savings! We came perilously close to a complete meltdown, and most people don’t even know it.
I have a theory why they aren’t explaining this on CNN, Fox and MSNBC — and they may be doing the right thing — that by explaining how close we came to an across-the-board run they might precipitate one. Now the government is acting, we hope quickly, to get FDIC-like insurance in place for brokerage accounts, and charging the companies appropriately for it, so they pay in advance (unlike Bear Stearns), so the general taxpayers of the US don’t end up footing the bill, and hope that while this system is being put in place, everyone who has their savings in a brokerage feels comfortable leaving them there, at least for the time-being.
But note that Bear Stearns didn’t get the bailout, the people with deposits there got it. True, the rest of the brokerage industry got a reprieve, but that didn’t cost us anything, at least not yet.
PS: It’s a Wonderful Life features a bank run.
The NY Times had a story yesterday, much-written-about in the blogosphere, that said that bloggers were working themselved to death. This was one article about blogging I was glad to be left out of, even so, it could have been about me, a number of years ago, when my lifestyle almost did kill me.
In the process I learned a lot about heart disease. It seems the Times didn’t take the time to check with a doctor to see if the premise of the article was reasonable or even possible. Could you work yourself into a heart attack? Perhaps. But not in a year or two, it takes decades for heart disease to become symptomatic. They did autopsies of soldiers killed in the Korean War and found that many of them already had heart disease, some of them in their teens and early twenties. They wouldn’t have known until they were in their forties, fifties or sixties, maybe even later.
There were other reasons to hate the Times piece, but those were amply covered elsewhere.
I had a really bad cold all last week and through the weekend, but it’s better this morning, I believe the sickness is gone, but the symptoms linger. It would be great if I had fiery blog post in me — some newly apparent truth to expose, an insight into an opportunity, but I don’t have one. But I wanted to post anyway, to say hi, and hope all is well.
In any case…
I’ll leave you with one good thought.
On the news this morning, a profile of the guy in the General Accounting Office who’s in charge of the transition that will start later this year, as we swap the government we have for a new one. He’s renting huge amounts of office space, buying computers, networking equipment, Blackberries, everything you need to instantly bootstrap a new government running in parallel with the old one. What an interesting job!
And it put me in a good mood that, even though the process drags on, eventually it will conclude, and by the end of this year (it’s already April) we’ll be starting the transition to a new government.
So I guess I had something to write about after all. :-)