Crisis

8 Items to Learn About Banks and Bailouts #1

From the birth of our country through the great depression, financial crisis leading to bank panics were not uncommon. The situation would play out around every 20 years. Citizens would flock to their banks and withdraw their savings. Banks would go under. The banks that didn't go under would stop lending. Businesses, unable to receive loans, would stop hiring. Unemployment would rise. One crisis after another.

We thought we had learned our lesson after the Great Depression. The problem was solved. Through the judicious use of monetary policy, through the control of the money supply, it was thought that any recession could be controlled. We now find ourselves in a liquidity trap where the interest rate for Fed loans to the banks is already zero. Monetary policy is not an option on the table.

It doesn't help that we are no longer a nation of thousands of community banks. Mergers and acquisitions has left our system controlled by a handful of large national banks. These banks, we are told, are too big to fail. It is feared that they could bring down the whole system. The fears are not unfounded.

Here we sit in the midst of the largest financial calamity this country has faced since the Great Depression. We seem to be relying on the minds of the very people who got us into this mess to get us out. No one in the administration or the Congress seems to be listening to our finest economic minds and their prescriptions for handling the mess. People, both lay and expert, are cynical. Yes, everyone agrees that things will get worse before they get better, but how bad will they get? How long will the recession last?

Here's the problem: there are no easy answers and politicians like easy answers. They do not want to stick their necks out, not while a small group of rabid conservatives lie, distort, and scream about every move made. After all, there surest path back to power is to obstruct any chance to end the crisis. Until the administration and the Congress face up to the challenge, we will sit where we sit today. In trouble, with little hope in sight for a conclusion.