Remember this NYT op-ed by the University of Chicago's Casey Mulligan last October? Well, as bad as it was then, it's even worse now. (Keep in mind that this is a full professor of economics in the #1 ranked economics department in the country):
The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated. ... Although banks perform an essential economic function — bringing together investors and savers — they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks playing any essential role. [ed: Wow. Just wow. I didn't think it was possible to be a professional economist and also not understand a single thing about how a financial market works. Apparently I was wrong.] What’s more, it’s not as if banking services are about to vanish. When a bank or a group of banks go under, the economywide demand for their services creates a strong profit motive for new banks to enter the marketplace and for existing banks to expand their operations. (Bank of America and J. P. Morgan Chase are already doing this.) ... And if it takes a while for banks and lenders to get up and running again, what’s the big deal? Saving and investment are themselves not essential to the economy in the short term. Businesses could postpone their investments for a few quarters with a fairly small effect on Americans’ living standards. How harmful would it be to wait nine more months for a new car or an addition to your house?Ah, memories.
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"...what’s the big deal? Saving and investment are themselves not essential to the economy in the short term. Businesses could postpone their investments for a few quarters with a fairly small effect on Americans’ living standards..."
Such a shame that tarring and feathering has gone out of fashion.
Don't be too hard on the prof. In some sense he is saying "look, back in the 50s I walked 20 miles to school; in the '82 recession the average car age was ~10-11yrs." This is all true; we will survive. But, the economy will roll back 30 years in the time span of 3 years. In will be a brutal survival which leads to drastic social change ... maybe a US Cambodia will make an example of him!
This is true banks are not going to vanish with this recession losses. Here, hopes for new banks to enter in the market is more than the expansion of current banks.
A major problem in our society today is the high esteem in which economists are held. Economics really is an ivory tower social 'science'. Anyone who has studied economics can see that it is a pseudoscience with "physics envy", and that small subjective changes in models and assumptions can often produce any result desired.
Maybe an analogy would be to expect a poet to understand publishing or linguistics, or an art history professor to be able to paint a landscape. Economists should be expected to be good at economic modeling, which can on occasion be extremely helpful in distilling the effects and consequences of laws, taxes, trade, etc.
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