Comment 29838

By George W. Bosch (anonymous) | Posted March 30, 2009 at 11:39:00

(leapfrogging ^this idiocy^ and replying to the actual discussion)

While we remembered the Depression lesson about not closing our borders, we forgot the lesson about keeping our banks prudent and solvent, and I'm still not quite sure this has been enough to re learn that lesson (I hope it has). This whole crisis has been one big bank run on some very funny looking banks. After that, regulators around the developed world made sure that would never happen again, and for the most part they were successful, with deposit insurance coupled with banking rules that prevent too much risky speculation. (It's not enough just to have the rules, because some bank panics are self-creating -- a rumour goes around that a bank may not be solvent, and people start panicking and pulling out there money, which makes the bank insolvent in a self fulfilling loop. So you need the rules AND you need the deposit insurance so people don't worry that there money might not be safe.) Except we forgot all that and let a bunch of new banks grow up outside the rules. Just like we forgot in the 80's with the Thrifts disaster (remember them?). You'd think we'd of learned our lesson then, except that crisis didn't spill over too far and we contained it by the government basically sucking up the losses to protect the real banks. Then we let it happen all over again with the derivatives funds and international speculators. Then Long Term Capital Management blew up in the late 90's and everyone started talking about bank regulation again, but no one could really be bothered and the government would-be regulators clapped themselves on the back and said LTCM was a fluke, a one-off. So the derivatives funds got bigger and bigger and their instruments got more and more complicated, and suddenly tens of trillions of dollars were tied up in great whipped up towers of financial cotton candy. It ran fine as long as more money kept funnelling into it and people were confident that there money was safe. As soon as that started to change, like when there was no one else left to buy a house and, crap, gas prices just doubled, and, oh s***, people are starting to default on there mortgages, people started to worry about whether there money was safe, and they started to pull it out, and -- LO AND BEHOLD -- there was a panic and a bank run that toppled the whole thing and destroyed trillions of dollars. Two things could have prevented this -- you guessed it, regulating these funds like banks and having deposit insurance. But the traffic controllers were asleep at the switch and they let the plane crash right into the middle of town, cracking everything up. It doesn't help the people in the town to say it was the fault of the pilots or the crew or the passengers or even the traffic controllers. We need to make sure this kind of thing doesn't happen again. I HOPE that this crisis is big enough that even the financial cowboy free marketeers who've been running the show until now figure out that we need to get back to regulation. I don't know it for sure, though, and I'm worried that Obama has picked all the same cowboys of industry to run his finance plan. I'm afraid they'll put up a shell of accountability and just resume playing the game behind our backs until the next crisis blows up in our face.

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