Bank-bashing with a vengeance

Over the decades of (relative) macroeconomic stab- ility in the second half of the 20th century, profit-seeking com- mercial banks and state-owned central banks worked together to lower the cash-to-asset ratios in the banking industry. An understanding grew that profitable and well-capitalised commercial banks should be able to borrow cash from the central bank if they had trouble maintaining a positive cash reserve balance. The associated arrangements were technical and complex, and were of no interest whatever to politicians and journalists. Fashionable economic commentators regarded them, or rather ignored them, as the municipal drainage of the financial system.

Meanwhile the long period of peace between the world’s leading nations encouraged lending between banks in different countries to an astonishing extent, so that by early 2007 the value of the international inter-bank market was on some measures over $40,000 billion or almost two-thirds of global output. In the middle of 2007 this market suddenly closed.