The Great Bank Run of 2011

Silent Paralysis

We read recently about the "secret" bank run in Greece.  Folk have been taking their money out of bank deposits in Greece and (literally) putting the money under mattresses.  They don't trust the solvency of banks any more.  Better to get their money out before its too late.  But it appears that this is not just a Greek problem.  Europe-wide the "folks" are taking their money out of European bank deposits and putting the money . . . where?  In US banks, it would appear. 

This fear-driven phenomenon would indicate a coming recession/deflation rather than recovery.  When people store their money rather than investing it, deflation usually stalks the land.  

Here is Larry Kudlow's take:

August 18, 2011 3:00 P.M.

The Deflationary M2 Explosion
Fears over the safety and solvency of European government debt and banks are haunting the stock market.

Amidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.

According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.

What’s going on here? There’s a flight to government-guaranteed accounts. Some people believe Europeans are withdrawing from their own banking system and parking their money in the U.S. banking system, guaranteed by Uncle Sam. Kelly Evans reports in her Wall Street Journal column of a $30 billion outflow from equity mutual funds that has probably gone into cash. . . .


“The recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets,” writes Darda. He also notes that widening corporate-credit risk spreads and shrinking government-bond rates signal a recession risk, not a coming boom. . . .
 

Economist-blogger Scott Grannis writes concludes, “In short, it looks like there is a run on the European banks and the U.S. banking system is the safe-haven of choice.”  . . . .

I would just add to all this: The biggest problem for the plunging stock market is coming out of Europe. Fears over the safety and solvency of European government debt and banks are haunting the stock market. I still don’t believe it’s 2008. But yes, like everyone else, I’m worried.

That said, we are awash with liquidity everywhere. U.S. banks and companies have more cash than they know what to do with. The problem is they are immobilized by fiscal policy run amok. We desperately need a regulatory rollback and flat-tax reform to boost asset prices and to get banks to loan, companies to invest, and America back to work.
– Larry Kudlow, NRO’s economics editor, is host of CNBC’s The Kudlow Report and author of the daily web log, Kudlow’s Money Politic$.

Japan has been going through a prolonged deflationary period.  Stagnant economic growth has been coupled with extravagant government spending in the attempt to stimulate economic growth.  People have just retrenched and hoarded their money.  Why?  So often these things turn around perceptions--the national psyche--which, after all, is the social aggregate of what folk are thinking in their hearts. 

When the post '87 property speculative bubble burst in Japan, the government responded by trying to avoid the loss of face that would accompany widespread bankruptcies and commercial failures.  It wanted to let the markets and the economy down easy.  Pretty much in exactly the way US, European, Australia and New Zealand responded in 2008. 

But the problem is that people don't believe it.  They don't believe that everything is going to be hunky-dory.  The assurances of governments and political leaders are not credible.  In their fear and doubt they reduce debt, hunker down, and . . . wait.  In this climate, government spending and pump-priming just throws good money after bad, until it all becomes bad money.  If the hard hits haven't come, people don't believe things are going to pick up and get better. 

When we were kids our mothers used to tell us that our stomach aches would not go away until we vomited.  Once we had had a good session with the bowl (or whatever else was handy) we could look forward to things getting a bit better.  Because we have not really had the relief of a decent recession, folks doubt that things will pick up.  The fear that the "big one" is still coming erodes confidence.  Hunkering down is the best strategy. 

When governments lose credibility, they lose influence and power.  President Obama, for example, has become a lame quacking duck.  Speech after speech after speech.  Nothing done.  The electorate no longer willing to suspend its disbelief.  The result: retrench, hunker down, wait.  Store cash for the rainy day that is  surely coming.  Welcome to the world of economic paralysis, of gnawing fear.