It's A Wonderful Life And The Bank Run Theory

When I was in graduate school, I studied with professors who styled themselves Aristotelians, but in hindsight, they were just poseurs. When I became Catholic and began to look seriously at Aquinas, I began to understand how a real Aristotelian thinks, but at the same time, I realized that I actually began thinking as a real Aristotelian when I left graduate school and went into tech. A good Aristotelian looks for causes. One of the first bits of wisdom I picked up from my tech mentors was that in tech, things don't "just happen"; you can't say, "well, the program just crashed". The program crashed for a reason.

So I've been reflecting for days on Prime Minister Trudeau's reversal of his emergency declaration. It didn't "just happen". It happened for a reason. On Thursday, I listed several possible reasons, and a visitor has helped me sort through their likelihoid. Of potential opposition to the emergency declaration among either the Liberal caucus or the Canadian senate, the visitor said,

I agree that things did not LOOK good in the Senate debate, with the emphasis on the appearance. Only the Conservative members of the Canadian Senate are still members of the Conservative caucus. In 2014 Trudeau expelled all the Senators appointed by Liberal Prime Ministers from the Liberal caucus as part of his pledge to reform the Canadian Senate into a non-partisan body. Of course a majority of the Senate was still appointed by Liberals and only 16 are Conservatives, but the Conservative members were the ones who were speaking to the Emergencies Act legislation as the debate began. I think no one seriously expected it wouldn’t pass, but only after a lot of coverage of Conservative talking points. Since the protesters had been cleared from Ottawa by this point, probably seemed best to move on.

As for the House of Commons, of course any Liberal MP who voted against the bill would have been expelled from caucus; that’s how the parliamentary system works. Unless there is a so-called free vote, of which there have been perhaps half a dozen in the last seventy-five years, an MP must vote with his party or face being kicked out and having to sit as an independent. In this case the vote was viewed as one of confidence in the government, and if it had failed an election would have been triggered. This was the reason the NDP leader gave for supporting it. Mounties have denied that more than a few hundred names were released to banks; certainly not those of “Brianes” who donated $50.

I think that pretty much rules out the theories that involve loss of confidence in Trudeau by his caucus or the senate. The other theories I listed involve either opposition by financial interests to the need for them to police their customers, more specific concern about bank runs by customers worried that their accounts would be frozen, or beyond that, a more general groundswell of public opinion against the declaration. These are not, of course, mutually exclusive. The visitor raised two objections to the bank run theory or its variations:

Canada only has about 25 banks and five of them control 85% of all Canadian banking business. I think a “run on the banks” is a meaningless concept in the Canadian context.

, , , I was at the bank on Friday midday and all seemed normal. I note that the stock of all five of the Big Five banks was up on Friday, so if collapse is imminent it’s a closely guarded secret. I note that Mr Marazzo’s (former) bank has 12 million customers, close to the equivalent of a quarter of the population of Canada, and TD has 13 million, so even if every former Truck Convoy donor removed his or her money it would be a drop in the bucket.

There are two counters to these arguments. The first is what George Bailey outlines in the scene above from It's a Wonderrul Life: banks don't just have vaults full of cash. They make their money from loans on which they charge interest. The loans are funded by deposits. The vast majority of the deposits are paid right out again to borrowers. Their cash on hand is kept to a minimun specified by bank regulators. To say that Wampus Bank has $38 trillion in assets (or whatever) says nothing about its cash on hand, and if a relatively small number of people suddenly cash out their accounts such that the bank's cash reserves are threatened, that could lead to insolvency no matter how big the bank.

The other great Hollywood film about bank runs is The Big Short, which is about how several groups of contrarian analysts discover and profit massively from the causes of the 2008 US banking crisis. This is proof if no orher that banks fail no matter how big they are. In one delicious scene, a Standard and Poor's analyst haughtily defends her deliberate blindness to the actual crisis in the US banking industry by insisting that even the contrarians are hypocrites, since they have bosses like she does, and they're all part of the same game.

The game, which I think both George Bailey and the Big Short contrarians would agree, is credit. The word is based on the Latin credo, "I believe". In turn, we have concepts like credibility. Commerce is based on an overall trust in the players' credibility. Just because you may walk into your bank on Friday morning and see everything looking normal isn't necessarily a guarantee that it is. That's certainly one of the subtexts of The Big Short. Indeed, if bank stocks were up that particular day, it could just as well reflect they'd been down earlier but had recovered, due possibly to investor concern about the overall credibility of the banking system if it began to seem like it was arbitrarily freezing accounts without due process.

In that case, even prior to anything like an actual, or just a significant, run on Canadian banks, this could certainly make Canadian bankers nervous. Certainly US banks suddenly became very sensitive to accusations that they were gouging on overdraft fees via practices like delaying overdraft notices to customers until multiple overdrafts, generating multiple overdraft fees, could be charged. Once the bankers realized this gave their industry a bad name, they dropped the practice quickly.

Naturally, Trudeau could have reversed course on the emergency declaration for actual reasons we may never learn. On the other hand, accusations of bank overreaction and arbitrary freezing of accounts were prominent after the emergency declaration, and given the banks' motivation to avoid controversy, they may well have deemed it prudent to head off any possible public panic by urging Trudeau at least to take them out of the process. The fact that a number of Canadian banks then felt the need quickly to correct the public record in their cases supports this view as well.