I used to teach Money and Banking. While its true that we have all sorts of safeguards in place now that were not there in the Great Depression and in the numerous bank runs and “panics” of the 19th century, never discount the power of mass psychology to unhinge everything. The speed with which data and rumors now can spread, combined with a lack in faith in what our government and Fed officials tell us could change the rules in unpredictable ways.
The post-mortems on Bear Stearns now show that it should not have happened. Looking back, it appears that the Fed and Treasury did not act quickly and forcefully enough early on. The top guy at B-S kept issuing reassurances that were belied by the data. An injection of liquidity sooner could have prevented the panic that made the over-leveraged, sloppily-run company survive, albeit in reduced form.
This rush for liquidity by depositors could hit a lot of banks in the coming week. The public may not be placated by Treasury and Fed reassurances and start switching their deposits from well-known weak banks to strong ones.
May you live in interesting times.
