87. Lessons from banking profits in the Great Depression |
May 2, 2009 § Leave a comment
This article also has the banking system as central to a recovery.
There is a general consensus today that we must do everything possible to avoid large-scale bank failures, and that this was not done during the 1930s. However, the impact of the widespread failures that took place then was much more limited than is generally assumed.
Another key reason was that the degree of concentration in the banking industry was much lower then than it is today. In the mid-1930s, the top three banks held about 11% of the total assets of the industry; in 2008 they held about 40%. Although about one-third of all banks failed between 1930 and 1933, they accounted for only about 20% of all deposit
The resilience of “normal” banking operations to a recession or even a depression strengthens the case for a separation of commercial and investment banking activities. The classic banking operations of deposit-taking and lending tend to remain profitable even under stressed conditions. But this classic function of banking would not be such a cause of concern today if the investment banking arms of banks had not gotten into trouble by investing in “toxic” assets. At present, the authorities in both the US and Europe have little choice but to make up for the losses on “legacy” assets and wait for banks to earn back their capital. But to prevent future crises of this type, policymakers should make sure that losses from investment banking arms cannot impair commercial banking operations.
ending on the refrain that we need to build back the banks on the investment side, and pay for it. just wealth transfer.