Notice the misguided policies of the Fed and FDIC though. By preventing all bank runs for decades, the Fed instilled an artificial and undeserved confidence in banks.
It would be far better to disclose banks in trouble, let them go under one at a time quickly, rather than have a gigantic systemic mess at one time.
Secrecy, in conjunction with fractional reserve lending is an exceptionally toxic brew. Overnight trust can change on a dime, system-wide, and it did.
Moreover, by keeping poor banks alive (and my poster-boy for this is Chicago-based Corus Bank for making massive amounts of construction loans to build Florida condos), more money pours into failed institutions further increasing toxic loans.
I’ve been trying to avoid political posts but I think this point by Mish deserves some thought.
According to Solomon, “If you are wise, you are wise for yourself; if you scoff, you alone will bear it.” Public policy for the last century seems to be aimed at disproving Solomon on this point. The state claims it can protect us from bad economic choices and promote growth.
In the first place, as Mish points out in the case of banking, these interventions seem to have the effect of delaying small crises until they form one massive financial tsunami. The boom-bust mini-cycles are smoothed over until we have a massive crash.
But secondly, the real social safety net is destroyed in favor of a state safety net that cannot fail to cause extreme depression-level problems. The real social safety net was people learning to look after themselves. People new banks were not that reliable so they spread out their risk. They kept cash and used other means to diversify their savings. An occasional bank failure would reinforce this wisdom and cause people to adopt behaviors that would ameliorate the effects of these failures.
Something similar could be said for a continual boom-bust cycle (even thought that cycle itself is due to the State’s fiat currency). If people know that there will be economic downturns every three years then they will use the “fat years” to save for the “lean years.” By producing decades of artificial growth, the state has discouraged this basic rational and wise behavior.
Humans are treated by their governments like animals kept in a zoo. They are bred in captivity and never develop the survival habits they would need to live on their own. The difference is that while humans can provide for animals, they cannot turn the globe into a zoo for humans with any chance of actually continuing to provide for their wards.
Sooner or later, whether we like it or not, we are going to be turned loose. Learn wisdom now.