Roger Backhouse and Brad Bateman wrote:
>
> Would anyone deny that the reason why banks were bailed out was that 
> it was believed that the entire banking system might get pulled down 
> and that the consequences of such a failure would be a disaster? One 
> can argue with details of the bail-out, but we are incredulous that 
> anyone would deny that if all the insolvent and illiquid banks had 
> been allowed to fail that the economy would have collapsed into 
> Depression. Bernanke surely took the view that allowing so many banks 
> to fail was a major policy error in 1929-30 and did not want to run 
> the risk of something similar happening.
>
I agree that Bernanke and several others thought and perhaps continue to 
think this way.  It amazes me, however, why the institutional 
differences between the early 1930s, before the establishment of the 
FDIC and its Credit Union counterpart protecting (insuring) bank 
deposits, appear to be lost on so many people, including Roger and 
Brad.  How many people have more than a quarter million dollars in an 
account type with any one insured depository institution for them to be 
afraid of losing their deposits from a bank failure?  How long did the 
lines that formed around IndyMac Bank in San Diego last in the fall of 
2008?  My judgment is that Bernanke learned the wrong lessons from the 
1929-30 period and applied the wrong remedies this time around.

Roger and Brad also wrote:
> Our claim was that the deregulation that freed banks to make the 
> disastrous investments they did was driven by a vision of unfettered 
> capitalism that led to important regulations (such as the separation 
> of investment and retail banking) being removed and the failure to 
> impose reasonable capital requirements on depository institutions.
The U.S. bank deregulations in the 1990s were just getting the U.S. 
banking system closer to what obtained (and continues to obtain) in 
several other industrialized countries, including Canada, where 
investment and retail banking are not as separated as the Glass-Steagall 
Act imposed on the U.S. system.  It is called "universal banking."  In 
any case, several large banks had found ways around the earlier 
restrictions through other means, like bank holding companies.

It is also easy to claim that the Federal Reserve or the U.S. government 
failed to impose "reasonable capital requirements on depository 
institutions" and such failure was responsible for the financial 
crisis.  But what is a "reasonable capital requirement"?  Indeed, the 
Fed already classifies depository institutions by their capital-asset 
ratios into different categories of "capital adequacy".  The interest 
rates at which depository institutions were able to borrow from the 
Fed's Discount Window were also determined partly by banks' capital 
adequacy.  So, that "supervision" was already in place before the Fed 
went wild with its doling out of new money to institutions, including 
those that previously didn't qualify for such privileges such as 
insurance companies.

  The problem during the early 1930s was a shortage of cash to meet 
depositors' demands.  We need to be clear about the difference between 
cash and credit.  Although central bank money (cash) generates 
additional credit, most of an economy's credit derives from the public's 
savings with depository institutions.  Alas, Keynes's definition of 
money to conflate the two concepts, money and credit, appears to make it 
hard for some people to recognize the difference.

As I recall, Hank Paulson, the then Treasury Secretary, pressured some 
big banks to take the $25 billion they were being offered, as if the 
banks needed such government money in order to be able to lend to 
businesses.  If we would remember that banks depend mostly upon the 
deposits of their customers in order lend, we would be less inclined to 
believe the claims that supported such bail outs.  We would also be less 
inclined to blame "capital inadequacy" for the crisis.

I also find it quite interesting that Roger and Brad are silent on the 
issue of "equitable wealth distribution" which they were seeking from an 
economic system, but which "unfettered capitalism" is unable to 
produce.  I don't think technical qualifications were required to have 
pointed out the misguided nature of most of the occupiers' demands in 
their /New York Times/ article.

James Ahiakpor

-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
(510) 885-4796 Fax (Not Private)