Inside Financial Services

SOME INDUSTRIES REALLY ARE MORE EQUAL THAN OTHERS

This seems wrong-headed in a very basic way:

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This seems wrong-headed in a very basic way:

. . . There is a pervasive myth that banks are different — special, somehow — from all other companies and industries in the economy. Anyone who questions this is at risk of being declared incompetent.

In fact, many claims made by leading bankers and banking experts, including academics, have as much substance as the emperor’s new clothes. But most people don’t challenge these claims, even as the claims affect policy. The specialists’ confidence is too intimidating. Even people who know better fail to speak up. The public is taken in. [Emph. added]

No! The reason the financial crisis was the big deal that it was is that banks-or, more properly, the financial services industry–are different from other industries. They facilitate the creation of credit for the entire economy. Recall that when the commercial paper market seized up after Lehman’s collapse, even companies like General Electric faced a funding crisis and possible insolvency. That’s different from what happens when, say, the automakers used to shut down every August. An apt analogy is electric power generation: if the nation’s electric companies all of a sudden went dark, the macroeconomic effect would be beyond massive. Subsitute “credit” for “electricity,” and you’ll get the picture. Admati and Hellwig are simply wrong. I don’t think I’ll be buying their book. . . . P.S. If pro-banking industry specialists have been doing a lot of intimidating lately, I must have missed it. . . .

4 Responses to “SOME INDUSTRIES REALLY ARE MORE EQUAL THAN OTHERS”

  1. martyhawk

    you are soooo right. Banks are the fuel for the economy.

    • Jessik

      The stock market will suvrvie. The banks will suvrvie. The mortgage companies will be controlled after the Democratic Oversight people like Bernie Franks and Senator Dodd fell asleep at the switch and Rep. Rangle forgot that he owned rent paying income property.

  2. T.F.

    This is a simplyfied view. If banks were allowed to fail – all of them – the whole structure of the financial system would be different. Banks could not grow so big because nobody would lend to them any more once they become too intransparent or if they run a substiantial liquidity gap. Companies like General Electric would not go insolvent if they kept enough long term funding to survive a liquidity drought. But of course it is cheaper to rely heavily on short term funding for long term assets and call in the tax payer if something happens…

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