It’s A Wonderful Life … If You Have Rights to Other People’s Stuff

“Strange, isn’t it? Each man’s life touches so many other lives. When he isn’t around he leaves an awful hole, doesn’t he?” – Clarence, It’s A Wonderful Life

“Gold is money, everything else is credit” – J. P. Morgan

The pastor has been doing a series for Christmas where he incorporates a classic Christmas movie into each sermon. This week it was A Wonderful Life.

I will confess that the reference to the movie caused me to (briefly) completely lose touch with the sermon. For those familiar with the movie, there is a scene early on where George (Jimmy Stewart) has to thwart a bank run at the Building and Loan. He uses his life savings (which he was going to use on his honeymoon) in order to fund withdrawals until the Building and Loan can reopen, and hopefully survive.

In the scene George makes the ridiculous, yet accepted far-and-wide, argument that the people couldn’t have all of their deposits back because they were used to fund loans to other people. The people are afraid that they money they have deposited in the bank – in demand deposit accounts, that they have a right to at any time – won’t really be there for them if they need it back. So, they do what people should do when they fear that their savings will be lost – they move quickly to rescue it. Then, as expected, they are chastised (ever so slightly … it is Jimmy Stewart after all) for demanding what they were promised.

In the roaring 20s as today the banks have lent money at interest that wasn’t actually theirs to lend. Sure, it’s legal for them to do this, but the law represents a fundamental violation of property rights and logic. Two people cannot hold claim to the same asset at the same time. I’m obviously not talking here about joint claim – as with a business or a marriage – but dual, individual and equal claim on an asset.

The depositors own their deposits. But the bank also has rights to the deposits and can generate credit with them (not money, mind you, but credit … and as J.P. Morgan pointed out, everything other than gold is credit). When the two claims conflict with one another we find out just who has rightful claim.

Quite often, the rightful claim is determined by the “blood from a turnip” approach. If the bank cannot liquidate assets to fund deposits then the depositors will get wiped out. Their claim gets tossed.

Americans will often hear of bank runs and say “yeah, but that couldn’t happen now” – and yet bank runs are quite common in the world today. Greece 2015, Bulgaria 2014, Cyprus 2012, Iceland 2008, and even Wachovia, Washington Mutual, and IndyMac here in the US in 2008. When underlying asset prices change the banks lose money on their leveraged positions (e.g., global financial crisis). They become insolvent and nobody gets their money back (certainly not all of their money).

Could it happen again? It will happen again. Nothing is so certain as that. Who’s next? Probably some Italian bank (e.g., Monte Paschi). But the problem is systemic. The system is built on falsehood. It is built on a continually failing model. We won’t find bankers “smart enough” to avoid future banking failures – we have to overhaul the system so that it is viable.

But how? Why not outlaw fraud? Why not outlaw fractional reserve lending? In the modern day there is no reason that we have to have a link between saving and lending functions. People who want to lend (even pool funds for lending to share risk) can do so without going through the banks.

People who want to use a bank for deposit reasons only should be able to do so. Sure, it won’t be free, but the implied risk we take on now is also not free.

Of course, it wouldn’t make for a great movie scene. “Hey, remember that time there wasn’t a bank run and you didn’t have to spend your life savings to rescue the business?”

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