Monday, August 20, 2007

Matt Yglesias and the Great Depantsing

Matt Yglesias has an uncharacteristically (for Matt) unsophisticated post up about the mortgage meltdown and the practice of banking (link). Matt puzzles over why the mortgage meltdown is creating such a pervasive problem. He discovers that the mortgage enterprises are, in some sense, like banks, and finds this insight, on the whole, comforting.

For most non-economist commentators, this probably draws a passing grade. But you might have expected ominicompetent Matt to realize that (a) there is no good, workable definition of what is a bank; and (b) correspondingly, everything is a bank, actually or potentially.

What’s a bank? The conventional old-style definition is that a bank is an entity that (a) takes deposits and (b) makes loans. Fair enough, but consider a life insurance company. It “takes deposits,” in the sense that we leave money on account with it for years at a time. It “makes loans,” in the sense that it tries to turn a profit with the money on account. And you could say that anyone “makes a loan” any time he extends credit. I read somewhere that Toyota isn’t a car company, it’s just a bank that happens to sell cars. At first blush, I assumed the quip meant only that Toyota was so choked with money it had to cook up ways in which to invest it. On second blush, it sank in on me that for Toyota—indeed for any car company, maybe for any big-ticket inventory seller—the installment credit side of the business may come to dominate, leaving the “inventory” side as some kind of a loss leader.

This is the kind of pitch banks make when they argue that they play on an unfair playing field—they are constrained by regulation, but others are not.

I’ve got a lot of sympathy with this argument, but there is an unsettling mirror image. That is: at the end of the day, still banks really are different from any other kind of enterprise. Banks are party of a system that runs on trust, and once trust ends, the whole system unravels. So banking is the only system in which one does not gain from the failure of one’s competitor. I’ve heard people describe it as the situation you get in a rugby scrum when somebody loses his pants: all the players mill around and make a racket while the unfortunate recovers his dignity. Then they give high fives all round and charge off again down field. I must say, I don’t envy Ben Bernanke tonight, as he tries to play “lender of last resort” (cf. Charles Kindleberger, passim (link)) for an entire galaxy. Is anyone strong enough to rectify the great depantsing. Anyone? Anyone?


brad said...

I think a bank (a) takes deposits, (b) provides loans, (c) tells its depositors that their money (its liabilities) are more liquid than its assets, (d) collects net interest as a result, and (e) gets away with it almost all the time.

Anonymous said...

Well, the reason that people say that GM or Toyota are banks who happen to make cars, or the reason why I say it anyway, is explained succinctly here.

All the major auto manufacturers in recent years have made a lot more money by loaning money (some of it to buy cars) than they have by selling cars. You don't have to get into any deep analyses.

Walmart has been pushing into banking recently. If these car companies can make money by loaning people money to buy cars, why can't Walmart make money loaning people money to buy Walmart crap? They won't be an 'official' bank (they failed to get approval), but I think you'll find that they'll be a bank in all but name, and probably a very lucrative one at that.