> Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy.
Forced by whom?
Banks are required by govt law to have more assets than liabilities, but many institutions and individuals owe more than they have to no ill effect.
In the short-term, cash flow is the only thing that matters and even that is under some control. A bank can "simply" refuse to pay money that it doesn't have.
Yes, there will be consequences, but later, giving the bank time to do something useful.
However, current govt reserve requirements don't allow that.
Yes, I know the reason behind such requirements. My point is that they make certain bad situations worse and it's not clear that such amplification is required for the claimed benefits.
These aren't just banks. These are all corporations in the modern world, period. Everyone from Target to Citi issues notes in the money markets.
And yes, the banks are required to have more assets than liabilities. But that has nothing to do with the money markets or day to day operations.
Here's a crappy, but workable analogy. What do you do in a modern computer? Have enough money for all the programs that are running, up front? Or do you have some shared virtual pool of memory?
The money market is kind of like that. It's silly for each and every corporation to have all the cash on hand it needs for day to day operations. That would require a lot of money that would be sitting around doing nothing. A much more efficient system is to have lenders who dole out short term loans (that pay darn little but are almost guaranteed to pay back) to the corporations as they need them.
Suppose that January is just a nasty month, and Target has to dole out lots of money to its health insurance benefits. That's fine, they'll just issue more commercial paper, and it will all work out when they tally up the bills at the end of the quarter.
Without that money market, what would happen instead is that Target would either have to keep a lot more money lying around, or run into a brick wall if something bad happened. It's like forcing everyone to buy many times more memory for their computer than they would need in everyday situations.
I didn't say (write actually) that assets are cash.
I asked who would force the banks into bankruptcy and suggested that not doing so (immediately) might have been better than a total financial system collapse, which was supposedly the only other alternative to the massive cash infusions.
When I run out of cash or my liabilities exceed my assets (short term or long term), no one shuts me down immediately. I keep collecting cash and spend it as it comes in. The folks who I owe money to aren't happy when I skip payments, and eventually that affects my ability to do biz on anything other than a cash-basis, but there's no immediate shutdown.
In fact, most US bankruptcies are initiated the debtors, not the creditors, so the debtors can get out of unprofitable deals. (This isn't true in the UK.)
But we treat banks differently. As soon as they reach certain financial "targets", we shut them down. This is a choice that has consequences.
Forced by whom?
Banks are required by govt law to have more assets than liabilities, but many institutions and individuals owe more than they have to no ill effect.
In the short-term, cash flow is the only thing that matters and even that is under some control. A bank can "simply" refuse to pay money that it doesn't have.
Yes, there will be consequences, but later, giving the bank time to do something useful.
However, current govt reserve requirements don't allow that.
Yes, I know the reason behind such requirements. My point is that they make certain bad situations worse and it's not clear that such amplification is required for the claimed benefits.