Putting A Big Hole In The Idea A Run On Banks Has Legs

If the Fed wants to blow a big hole in the idea you need to rush to get your money out of a bank before it locks its doors the Fed can easily do so. All the Fed needs to do is adopt the policy that if a run starts, skids of freshly printed bills will arrive on the doorstep of the troubled bank the next morning. In our modern world, this should be a relatively easy task to accomplish.

While this solution may seem a bit simplistic, the argument can be made it would remove the notion depositors would not be able to get their money back. This concern is the key driver of such bank runs. 

In the overall scheme of things if handled properly bank runs are not a real threat to the system. This is because most people and depositors have few real options as to where to safely stash their wealth. This dovetails with the idea the banking system is a manipulated utility so why not manipulate away?

After pulling their money from a bank, worried depositors have three options. One deposit in another bank or institution, take it home where it gets buried or put under the mattress, or rapidly spend it on what would most likely prove to be a bad investment. None of these options bode well as a solution and the last two are particularly problematic.

If the policy was to simply provide liquidity when needed, most likely there would never need to be a panic. In the end, what is important is how a bank runs its business not how much cash it has on hand. This is because there is never enough cash on hand if depositors decide to withdraw their money in mass. Again the bigger issue is whether banks are solvent. As for the cash dumped into the system, that can easily be drained out as quickly as it was put in, it would then be a wash. No harm, no foul, at least that is my humble opinion. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)