It did not have to be that way. Simple rules elaborated by Walter Bagehot and Anna J. Schwartz involving a systemic review of the condition of the financial system, prompt intervention, and consideration of the condition of individual institutions could have prevented the numerous ill-advised bailouts. Additionally, evidence that the runs were not indicative of a pending collapse of the system, but were rather a simple matter of migration of deposits from weaker institutions to stronger institutions, were apparently not considered or ignored. Application of these considerations could have avoided the panic by the authorities and the strategy of bailouts for the megabanks.
The Cato Institute
April 10, 2014