Paul Krugman: Financial Russian Roulette

[marmar]

from the NY Times:



Financial Russian Roulette

By PAUL KRUGMAN
Published: September 14, 2008



Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.

To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the “shadow banking system.” Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by “nondepository” institutions, institutions like the late lamented Bear Stearns — and Lehman.

The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn’t so much reduced as hidden: all too many investors had no idea how exposed they were.

And as the unknown unknowns have turned into known unknowns, the system has been experiencing postmodern bank runs. These don’t look like the old-fashioned version: with few exceptions, we’re not talking about mobs of distraught depositors pounding on closed bank doors. Instead, we’re talking about frantic phone calls and mouse clicks, as financial players pull credit lines and try to unwind counterparty risk. But the economic effects — a freezing up of credit, a downward spiral in asset values — are the same as those of the great bank runs of the 1930s. ......(more)

The complete piece is at: http://www.nytimes.com/2008/09/15/opinion/15krugman.html?hp

[SoCalDem]

1. We are finally quitting WaMu today..

I resisted for a long time, but I do not trust them anymore..

We started out as Household bank customers, which was bought by Home Savings, and finally gobbled by WaMu..

we will keep our accounts at Union Bank, but the ones at WaMu are going to be folded into Provident Bank , where we have several accounts.. It's a nice little bank, where they know our name, and recognize our voices on the phone..and yes, we can call them and NOT get a phone-robot..

I resisted this long because of the hassle-factor of switching automatic checks and direct payroll deposit, but enough's enough..

[TransitJohn]

2. I resisted for the same reason

of hassle of switching auto payments and direct deposit. I live in Wyoming, and had been banking with a small local bank, one branch in Cheyenne and one in Laramie (I'm in Laramie). I had a five dollar share savings account in a local credit union from when I bought my truck like 7 years ago. Finally switched everything over to the credit union, and I found the switch extremely painless. :hi: