A rush to pull out cash

From the Los Angeles Times courtesy of Eschaton:

The rush to withdraw money -- by depositors that included a former Los Angeles Kings star hockey player and an executive of a rival home-loan company -- came a day after fears arose that Countrywide Financial could file for bankruptcy protection because of a worsening credit crunch stemming from the sub-prime mortgage meltdown.

The parent firm borrowed $11.5 billion Thursday by using up an existing line of credit from 40 banks, saying the money would help the lender meet its funding needs and continue to grow. But stock investors, apparently alarmed that the company felt compelled to use the credit line, sent Countrywide's already battered stock down an additional 11%.

At Countrywide Bank offices, in a scene rare since the U.S. savings-and-loan crisis ended in the early '90s, so many people showed up to take out some or all of their money that in some cases they had to leave their names. And In recent months, sales of high-end houses have been stronger than those for cheaper homes. Now, with a pullback in larger loans by Countrywide and other major lenders, the weakness at the low end is likely to spread upward, said Esmael Adibi, director of Chapman University's Anderson Center for Economic Research.

"The implication will be declining home prices, higher foreclosures, a significant slowdown in spending by consumers," he said. As home sales fall further, "ultimately job growth will slowly deteriorate."

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One of capitalism's fatal flaws is that money often flows in incredibly stupid directions. The standard thinking about this is that it's all okay in the long run; the market will discipline the stupid and recalibrate itself eventually. Of course, the same could be said of nuclear holocaust: everything will be destroyed, but life will return. Eventually. In the form of cockroaches and radioactive resistant fungus. Eventually.

It's really frustrating to be watching the "discipline" of "the market" in action. Once upon a time, in the wake of the Great Depression and for decades after, American leaders understood just how stupid investors and financial institutions can be, and enacted laws to prevent their economic suicide competition from getting out of hand. Then they forgot their lessons; the hateful, self-destructive philosophy of "market discipline" took over; deregulation ensued, and the savings and loan crisis of the 80s came as an inevitable consequence. You'd think that more recent multi-billion dollar brush with economic disaster would have served as a handy re-education tool. But no. Here we are again, and this time both the nation's and its citizens' credit cards are maxed out.

That's why this mad dash to withdraw funds, which is frighteningly reminiscent of depositor behavior in the early 1930s, is so disturbing. Right now, this is happening, as far as I know, with just this one bank, and people are putting their money into other banks, instead of, say, their mattresses, but it remains to be seen if Federal and EU economic actions, in stark philosophical defiance of "the market's wisdom," will go far enough to thaw the credit freeze.

This all could have been easily avoided.

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