In the depths of the financial crisis of 2008–2009, I spent a staggering amount of time learning about the history of bank runs. I read the Panic of 1907 by Bruner and Carr and found it helpful for understanding the 2008 crisis. The authors provide some lessons on how JP Morgan (the man) stepped in to help calm the cascading panics of the time. I was a portfolio manager at an emerging market macro hedge fund in 2008, 29 years old, and woefully underprepared for a bank crisis. US-born traders had little experience with financial panics. Our colleagues from developing countries did know a bit more about them, so with a bit of study and a lot of guidance from them, a picture emerged of how human behavior in panics drove the outcomes.
Today, I realized the panics of 1873, 1893, 1907, and 2008 rhymed with what was happening in 2020. I see some striking similarities with those bank runs and the panic induced by the Covid-19 illness. Human behavior plays a role in both, and it will take influential leaders and government to help control our worse fears and practices. The good news is there are tools we use in bank runs than could be used to fight the spread of the virus and contain its very tragic human and economic effects.
The Role of fear, mistrust, and misinformation
The Panic of 1907 was created by the failed attempt to corner United Copper Company. Any bank that lent money to this manipulation attempt suffered runs that spread to other banks with joint directors. If some sort of connection to the failed scheme was drawn, the banks suffered from panic withdrawals. People literally lined up on the streets of New York to get their money out of banks.
Like a bank panic, much of the country today is witnessing a medical panic. The Coronavirus we are witnessing is real, it originated in Wuhan China sometime in December of 2019, and many poor souls have died from the disease. It is spreading throughout the world, and most assuredly, many more people will be hospitalized and die from the virus before its all over.
However, seemingly rational people are carelessly spreading rumors that are only amplifying the fear of the disease. Some think the virus is a bioweapon released by China. I doubt he has his security clearances. CBS felt it necessary to publish an article that drinking bleach or snorting cocaine can’t cure the virus. I mean, the nonsense is getting funky. Grocery stores like Costco report shortages of Clorox, Lysol, toilet paper, and hand sanitizer. Rumors of all sorts proliferate throughout Twitter.
Now to the good stuff.
What are the ways policymakers can address this pandemic like a Bank Run?
Slow it down, have a Corvid-19 Holiday like a Bank Holiday
I’ve seen numerous analyses on how in two months, our hospitals will be completely overwhelmed at the current rate of virus spread. We will run out of beds, masks, ventilators; there will be no room in the inn, so the story goes. How do we stop this? Well, when countries experience bank runs, they have some good tricks to slow down the panic. Back in 1907, they would open only one teller window, forcing people to line up for hours to take their money out.
However, in the present-day, emerging market countries (and some semi-developed ones like Greece) have used bank holidays to slow down the run. With rumors flying around, just sending everyone home for a week maybe a great solution. Cancel everything, pretend like we are on Christmas holidays. No interaction, no spread. Use the time to get a handle on the communication, slow the progress, let hospitals and public health officials get their feet under them. Most importantly, by slowing the rate of spread, we increase the odds hospitals will be able to manage the sick.
The FDIC provides Deposit Insurance; the US should provide Free Healthcare during Pandemics
One of the reasons many of us were shocked by the banking crisis of 2008 were we mostly thought bank panics were a thing of the past. And indeed, because of the Banking Act of 1933 (also known as the Glass-Steagall Act), they mainly were. Providing depositor insurance calmed American’s mistrust of the banks and led them to panic less over losing their life’s savings should their bank collapse.
The opposite is true in healthcare today. Walking into a hospital can cause you to lose your life’s savings. If we indeed need to slow the progression of the disease, we need to encourage sick people to get tested, isolate them, such that the spread will slow. The Chinese response did just that, and it appears to be working. However, right now, there is zero incentive to walk into an ER in the US.
Anyone who does will likely face a co-pay of more than one week of pay, plus an unknown future bill lurking in the mail down the road. This alone will make any person question if they need to go to the ER or not. Plus, they may be scared to get close to a hospital, thinking they may get the virus. We may need safe zones for people to get tested. Whatever the case, we need to break down any barrier preventing sick people from getting care. Medicare could issue a billing code tomorrow for any patient who needs testing for Covid-19, and all care after that is on Uncle Sam. This way, everyone who MAY be sick can be identified without risking their life savings, and the lives of those they may expose down the road.
Take Control of the Message
In the panic of 1907, JP Morgan drew a line in the sand. He examined the books of all the banks near collapse, then chose the most solvent one (Trust Company of America) to defend. He declared, “This is the place to stop the trouble, then.” After quickly arranging some big cash infusions during that week, he took the time to educate the press and the clergy (the pulpit was influential during the time) about the actions taken to flood the banks with cash. By the following Monday, October 28th, 1907, some degree of order returned.
Now I’m not calling for all-out censoring of news on Twitter or Facebook, but well, the news flow could use some managing. The way we incentivize the mainstream media to generate clickbait for ads is not helping the fear situation at all. The more people panic, the more they will rush to read the latest “horrible” headline. The “algos” learn that horrible coronavirus headlines generate more traffic, and the editors will ask for more of it. The mainstream media will need to stop scaring the public. And, there is a precedent, as David Hudson Jr. at the First Amendment Encyclopedia explains.
Writing for a unanimous U.S. Supreme Court, Justice Oliver Wendell Holmes declared in Schenck v. United States (1919) that “[w]hen a nation is at war, many things that might be said in times of peace are such a hindrance to its effort that their utterance will not be endured so long as men fight, and that no Court could regard them as protected by any constitutional right.”
In other words, the Supreme Court declared that the government could restrict speech more in times of war than in times of peace.
Make no bone about it; this is modern warfare. The enemy isn’t China, ISIS, a hacker community, or some slimy mortgage bankers. The enemy is a virus, a few strands of RNA. This enemy, despite its small size, may require significant government mobilization to stop, even if it means trampling a bit on the first amendment to do so.
I’m not going to pontificate on how this will all end. Pandemics create chaos, and in turmoil, making predictions is kind of meaningless. Check out what the CDC has to say. Johns Hopkins has an excellent GIS dashboard for monitoring the spread. And I think we can learn a lot by studying the measures the Chinese took. But there are ideas learned in bank panics that policymakers could use in this pandemic panic. Let us pray our leaders are up to the task.