Mike Shedlock

One chart is all it takes to prove a full-fledged European bank run on the banks is well underway in the Club-Med countries and Ireland.

The below chart is from the Financial Times article The anatomy of the eurozone bank run by Gavyn Davies.

A bank run is now happening within the eurozone. So far it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers.

The fear of bank runs is deeply ingrained in all economists who know anything about the genesis of the Great Depression in the United States in the early 1930s. Then, the failure of the Bank of United States in December 1930 led to multiple bank runs across the country. Bank failures in the following two years wiped out personal savings and greatly exacerbated the collapse of demand in the economy.



The classic account of the crisis, by Milton Friedman and Anna Schwartz, concluded that the collapse was largely the fault of the Federal Reserve, which failed to provide enough liquidity to keep the banks functioning and thus end the panic.

Classical Nonsense

We need to stop right there for a bit because the "classic account" Davies believes in is complete nonsense. The crisis then and now is a crisis of solvency.

The culprit is fractional reserve lending coupled with fraudulent lending practices that allow banks to secure deposits for 2 years or less but lend money out for 30 years.

The way to stop runs on the bank is easy enough: stop fractional reserve lending and other fraudulent lending practices.

Davies continues with still more nonsense.

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.
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