Bank runs, inflation, and other desperate memes in the Internet age

[FRED]

Bank runs, inflation, and other desperate memes in the Internet age

The front page of yesterday's Wall Street Journal reads:

Bank Fears Spread After Seizure of IndyMac

The federal government's seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry, which is in a tightening bind following a long run of prosperity.

Banks and thrifts are struggling against a rising tide of bad loans, and it is becoming increasingly clear that some lenders won't be able to escape. While fewer banks are expected to fail than the 834 that went under from 1990 to 1992, it will likely take several years for battered financial institutions to work through their bad loans and replenish their depleted capital.

Those gloomy scenarios could be avoided, however, if the U.S. economy and housing market rebound soon, which would help consumers and businesses that have fallen behind on their loan payments. (See

Even signs that the worst is over could bolster the confidence of healthier banks enough to spark a flurry of takeovers that would rid the industry of some of its weakest performers.

But at least for now, as the turmoil worsens, signs are emerging that consumers, who generally thought little about the safety of their deposits when times were good, are having some second thoughts. More likely than the kind of exodus of depositors that quickly sank IndyMac is what some bankers are describing as a slow-motion "walk on the bank," which could cripple financial institutions already weakened by credit problems.

iTulip member GRG55 dug up this item from the NY Times in 1974:

Drivers Warned of Accident Liability in Carrying Gasoline Cans; Garages' Liability
January 13, 1974, Sunday
Section: General, Page 47, 318 words
Motorists who carry gasoline cans or spare gasoline tanks in their cars may be held liable in accidents that result in fires or explosions, Leonard Ring, president of the Association of Trial Lawyers, has warned. Mr. Ring said that even garages that installed the spare containers in automobiles might be held accountable...

And this one from 1979:

Storing Gas: Commonly Done, but Dangerous and Sometimes Illegal...
By SHAWN G. KENNEDY
July 10, 1979, Tuesday
Section: Metropolitan Report, Page B4, 750 words
Warnings about the danger of storing cans of gasoline in automobile trunks or at home seem to have had little effect over the last few weeks. Motorists who feared a worsening of the fuel shortage...

What do these have to do with bank runs? At the time, Americans believed that they might not have enough gasoline to get to work or for other needs.

Hoarding behavior is interesting, isn't it? No meme spreads faster or causes more desperate and irrational mass behavior than a "we're running out" meme. Running out of gas, out of food, running out of cash at the bank.

Consider your reaction if you went to the local supermarket and you noticed first the quality of the food was declining, then a few weeks later the quantity, with some shelves partially empty, and then a few weeks later whole empty shelves, then half empty isles. Some part of your brain will note the progression and say, "Wait a minute, what if this keeps up? Hundreds of thousands of people live around here. Maybe next week I come here and the shelves are empty, like before a hurricane, and there is nothing to eat. Where will I go? What will I do? I'd better get more food now."

And so it begins.

Inflation leads to hoarding, too, such as the gold bubble of the late 1970s. No one is thinking, "I'll buy gold and get rich" then. Everyone is thinking, "The purchasing power of my money is evaporating. At this rate, I won't have enough money to buy the things I need. Better convert my cash to gold now."

This has not yet occurred to most Americans, but at this rate eventually it will.

This is why the Bureau of Labored Statistics (BLS) manages the inflation data as they do: there was no Internet in the 1970s. In the Internet age the inflation meme will spread like wildfire driving precious metals hoarding behavior like nothing before. Keep 'em guessing is better than that making the true inflation rate official. Meanwhile, use interest rate derivatives to suppress interest rates so there is no confirmation there. Is the guessing game over?

Shadow of 1970s inflation starting to worry bondholders
July 15, 2008 (Reuters)

Surging energy and food prices are likely to underpin a further rise in U.S. bond yields in the near future, even if yields do not rise to the extent they did in the 1970s and 1980s.

U.S. Treasury bond yields rose above 15 percent in 1981, after U.S. consumer prices rose at more than 14 percent a year, in the wake of the inflationary effects of 1970s oil price shocks when crude oil prices tripled to over $9.00 a barrel.

"Even though I can't imagine our economy going to the same situation as in the 1970s, some form of stagflation may crop up," said Jonathan Lin, senior analyst with Louise Yamada Technical Research Advisors LLC in New York.

On to the topic at hand, bank failures. Last time we had bank failures there was no Internet. Now we shall see if a bank failure meme spreads and panic spreads.

Multiply this kind of coverage by 1,000 and what do you get?

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