Bastiat’s Bastions

For any of you who recall the original nanny movie “Mary Poppins,” you should recall the part of the movie where the little boy of the house goes to his father’s place of employment, an old British bank, and deposits his money, a twopence coin, at his father’s suggestion. But, when the little boy wants to take his twopence out of the bank to give to the pigeon lady (”Feed the birds”), and cries “I want my twopence,” he starts a run on the bank, as everyone begins to fear for the bank’s viability when they hear that that the bank will not return a depositor’s money, the “twopence.” The run on the bank results in too many people withdrawing their deposits out of fear which causes the bank to shut down, pushes it into bankruptcy. This is the downside of “fractional reserve banking” (and if you don’t know what this is look it up in your textbook or on Google).

In the 1930s, after numerous bank runs led to bank closures and the disappearance of deposits when banks cannot give depositors’ their money, the Federal Deposit Insurance Corporation, the FDIC, was born. Since deposits are insured, there is no reason to panic.

However, in this article from the L.A. Times, the federal regulators blame a letter that was written by Sen. Schumer to them, that questioned the viability of IndyMac, and that was made public, for causing such massive withdrawals that IndyMac had to close its doors and be taken over by federal regulators. This was the second largest bank takeover ever, as IndyMac had $32 Billion in deposits, and the bank run will cost the FDIC and the U.S. Treasury about $8 Billion.

While we all have free speech, there are certain things that are forbidden, such as yelling “fire” in a crowded theater, “bomb” in an airport, or “I want my twopence” in a bank.

Senator Schumer should pay the $8 Billion from his campaign funds (not that he has that much).

-MC

This entry was posted on Sunday, July 13th, 2008 at 3:36 pm and is filed under General, Political Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.