Throwing a lifeline to the financial system in times of crisis can have unintended consequences.
Among them: Making the world feel safer can lull people into complacency and excessive risk-taking.
The attempt to eradicate failure from the financial system, of course, is part of modern society’s broader push to make life itself riskless and idiot-proof
As my colleague Greg Ip pointed out in his 2015 book “Foolproof,” however, It also tends to coalesce massive power into the hands of a few people at the pinnacle of the financial system.
Former Federal Reserve Chair Alan Greenspan was known as “the Maestro”.
After U.S. authorities intervened to help calm a series of financial crises in 1998, Time magazine christened Mr. Greenspan, then-Treasury Secretary Robert Rubin and then-Deputy Treasury Secretary Lawrence Summers the “Committee to Save the World.”
Unfortunately, having some sway over markets can delude regulators and policy makers into believing that they can foresee the future.
“We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,” then-Fed Chair Ben Bernanke said in a speech in May 2007, “and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
“We’re not thinking about raising [interest] rates,” Fed Chair Jerome Powell said on June 10, 2020. “We’re not even thinking about thinking about raising rates.”
Even as rules have proliferated and bailouts multiplied, the U.S. stock market has suffered four crashes of least 20% since the year 2000.
The role of government as the markets’ guardian angel has gotten a lot more complicated. Social media accelerates and amplifies fear, and smartphones are instantaneous ATMs. In a matter of seconds, alarmed depositors can—and did—pull their cash out of a bank besieged by rumor and fear.
“Capitalism without failure is like religion without hell,” Berkshire Hathaway Inc. Vice Chairman Charlie Munger has said
This week, however, Mr. Munger struck a much more serious tone when he told me: “I’d prefer to live in a world where nobody did anything undisciplined or stupid and so forth, but we don’t live in that kind of a world. And therefore the decisions have to be made for the way the world is, not the way we’d like it to be.”
He added: “The way the world is, the government had no alternative but to back all deposits. Or we would have had the biggest goddamn bunch of bank runs you ever saw.”
Jason Zweig WSJ 17 March 2023
Too big to fail is in the process of being extended to a whole new set of banks
James Mackintosh WSJ 16 March 2023
The alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”
Lord Mervyn King, former governor of the Bank of England. His book is called The End of Alchemy.
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