New Home Sales and Recessions: The Graph
links for 2007-08-25

What Is A Bank?

Buce has a nice take on the subprime crisis:

Underbelly: Matt Yglesias and the Great Depantsing: Matt Yglesias has an uncharacteristically (for Matt) unsophisticated post up about the mortgage meltdown and the practice of banking (link). Matt puzzles over why the mortgage meltdown is creating such a pervasive problem. He discovers that the mortgage enterprises are, in some sense, like banks, and finds this insight, on the whole, comforting....

What’s a bank? The conventional old-style definition is that a bank is an entity that (a) takes deposits and (b) makes loans. Fair enough, but consider a life insurance company.... I read somewhere that Toyota isn’t a car company, it’s just a bank that happens to sell cars.... [F]or Toyota—-indeed for any car company, maybe for any big-ticket inventory seller—-the installment credit side of the business may come to dominate, leaving the “inventory” side as some kind of a loss leader. This is the kind of pitch banks make when they argue that they play on an unfair playing field—-they are constrained by regulation, but others are not.

I’ve got a lot of sympathy with this argument, but... at the end of the day... banks really are different from any other kind of enterprise. Banks are party of a system that runs on trust, and once trust ends, the whole system unravels. So banking is the only system in which one does not gain from the failure of one’s competitor. I’ve heard people describe it as the situation you get in a rugby scrum when somebody loses his pants: all the players mill around and make a racket while the unfortunate recovers his dignity. Then they give high fives all round and charge off again down field. I must say, I don’t envy Ben Bernanke tonight, as he tries to play “lender of last resort” (cf. Charles Kindleberger, passim (link)) for an entire galaxy. Is anyone strong enough to rectify the great depantsing. Anyone? Anyone?

I would say this: I think a bank is something (a) takes deposits, (b) provides loans, (c) pretends to its depositors that their money (its liabilities) are more liquid than its assets, (d) collects net interest as a result, and (e) gets away with it almost all the time.

For those times when it looks like they might not get away with it, we have reserve requirements, capital standards, central banks, and other lenders of last resort.