Bank and bust?
I must take issue with the April 18 column, “Avoiding financial meltdown” [Opinion], which argued that insolvent banks must be rescued with tax money to prevent their insolvency from spreading to other banks.
The column compared allowing a bank to fail with allowing a fire in a building to burn itself out and possibly spread to other adjacent buildings. This analogy, however valid it may appear, is faulty. The spread of a fire from one building to another would normally not be the fault of the owner of the other building — not so with one bank failure spreading to another bank.
A bank that maintains 100 percent reserves against demand deposits and avoids borrowing short and lending long should not be brought down during any financial panic. The failure of one bank would touch off other bank failures only if those other banks have also mismanaged their depositors’ money.
This would imply banks are undermining economic prosperity and should be taken over by their depositors.
The column’s bailout prescription for failed banks, far from being a long-term corrective measure, would keep them in a special privileged class of businesses that are shielded from market discipline, continuing to promote unsound practices.
— Mark Warner, Bellevue