Because supporting deposit and creditor payments in banking isn’t generally about solvency, it’s about liquidity. So long as depositors and creditors believe that they’ll get paid – that is, once a run on the bank is taken off the table – even a struggling bank – technically insolvent – can meet its obligations. For a long, long time. And often until it’s no longer insolvent. (Back to the analogy of the insolvent surgeon out of medical school.) But I realize that this is an inconvenient fact vis-a-vis your world view.
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Whoah, whoah, whoah! I’ve seen some circular arguments in my day but this one takes the cake. The only reason the big banks can meet their obligations is because the short-term debt that has to be rolled over occasionally has been guaranteed by the government. Otherwise, creditors would not re-extend that credit and the big banks would be the very definition of insolvent — they couldn’t meet their obligations.
This is exactly what happened to Bear Stearns. I guess you would argue that Bear Stearns wasn’t insolvent, they just ran out of liquidity. [/quote]
Breeze, for christ’s sake. Bear Stearns WASN’T A BANK! It had no deposits. It was entirely funded with debt. It was an INVESTMENT BANK. You do understand the difference between a commercial bank and an investment bank, don’t you? Yes, even the big commercial banks have short-term debt that needs to be rolled over, but it’s TINY in relation to their total funding base. It’s largely the investment banks that have the short-term debt issues. Yeah, Bear was insolvent. But, actually, even Bear probably could have eventually earned its way out of its problems… but it would have been too far down the road for it to matter. Bear probably needed to be shot. As well as Lehman, as unpopular as that is to say at this point.
