12 March 2009
Money and Banking 101
Borrowing short and lending long has always been the basic strategy of finance, not the “classic mistake” that William D. Cohan calls it in his OpEd article in the March 12, 2009 New York Times. FDIC insurance makes the short-term money available from small depositors less volatile than it used to be when runs on the bank were common, like in It’s a Wonderful Life.
One thing was “classic” about the collapse of large short-term creditors’ confidence in financial intermediaries like Bear Stearns, Lehman Brothers, Merrill Lynch, et al. That was how the irresistible lure of outsized gain masked the danger of ignoring business risk.
Rescuing big banks from failure is not really different from guaranteeing the stability of banks’ small depositor base. Insurance premiums should be charged for the former service just as they are by the FDIC. But even in the latter case, the FDIC’s backing by the full faith and credit of the federal government means that in extremis smaller banks would be bailed out with taxpayer funds, too.
Borrowing short and lending long has always been the basic strategy of finance, not the “classic mistake” that William D. Cohan calls it in his OpEd article in the March 12, 2009 New York Times. FDIC insurance makes the short-term money available from small depositors less volatile than it used to be when runs on the bank were common, like in It’s a Wonderful Life.
One thing was “classic” about the collapse of large short-term creditors’ confidence in financial intermediaries like Bear Stearns, Lehman Brothers, Merrill Lynch, et al. That was how the irresistible lure of outsized gain masked the danger of ignoring business risk.
Rescuing big banks from failure is not really different from guaranteeing the stability of banks’ small depositor base. Insurance premiums should be charged for the former service just as they are by the FDIC. But even in the latter case, the FDIC’s backing by the full faith and credit of the federal government means that in extremis smaller banks would be bailed out with taxpayer funds, too.
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