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Greek Banks and the “Perfect Financial Storm”

Jun 8, 2012 • Behavioral Economics, Economic History, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically, Uncategorized • 196 Views    No Comments

Like New York’s Knickerbocker Bank in 1907 or Jimmy Stewart’s 1930s bank in It’s a Wonderful Life, the ingredients of a classic run include distraught depositors and rumors of a bank’s imminent demise. Lines are long, emotions are volatile and, as the Washington Post tells us about the Knickerbocker run,  “Stacks of green currency, bound into thousand dollar lots, were piled on the counters beside the tellers.” However, as Jimmy Stewart finally has to explain–your money is not here; it is in the loans we gave your neighbors for their homes. Unimpressed, people want their savings. As a last resort, Stewart gives them his honeymoon cash and the Knickerbocker closes its doors.

Fast forward to 2012 and Greece.

Called a slow run or maybe a bank jog, money is leaving Greek banks. 21.9% unemployment means many people need their savings for everyday expenses. Others are worried that if Greece leaves the euro zone, their euro savings will become drachma savings and the drachma could be worth 60% less. They are also concerned about deposit insurance. Yes, Greek accounts are insured. But by whom? A Greek government with no money. Then, to make all of this even worse, Greek banks own Greek bonds that markets have massively discounted.

What does it all add up to? “Drachmageddon.”

Also, it returns us to the timeless prototype of a “perfect financial storm” that 2 Darden School scholars describe in their history of  The Panic of 1907. If you would like to read more of this amazingly prescient list (pp.4-5) here is an excerpt from their book.

  1. An overly complex system that enables contagion.
  2. Previously exuberant attitudes to growth.
  3. Narrowing financial margins of safety.
  4. Leadership that diminishes confidence and elevates uncertainty.
  5. Unforeseen adverse economic events.
  6. The emergence of a downward spiral with self-reinforcing pessimism.
  7. Ineffectual collective problem solving.

 

While this NPR Planet Money podcast, this NPR article and this CNN article describe current Greek banking problems, the Bruner/Carr detailed history, The Panic of 1907, wonderfully conveys the characteristics of typical financial storms. Please note also that the term, “drachmageddon” came from Greek financial journalist Kostas Mariolis.

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