Krugman on bank runs:
Bank runs come in two kinds.
In some cases, the bank run is a pure self-fulfilling prophecy: the bank is "fundamentally sound," but a panic by depositors forces a too-hasty liquidation of its assets, and it goes bust. It's as if someone calls "fire!" in a crowded theater, provoking a stampede that kills many people, even though there wasn't actually a fire.In other cases, the bank is fundamentally unsound -- but the bank run magnifies its losses. It's as if someone calls "Fire!" in a crowded theater, and there really is a fire -- but the stampede kills people who would have survived an orderly evacuation.
We're in the second case. The Fed has spent the last 7 months trying to assure people that there isn't any fire. But there is.
Worse yet, thanks to decades of deregulation, the theater doesn't have a sprinkler system - and the town the theater is in doesn't have a fire department.
And now we have to put together an emergency response.
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