Social capital and the financial crisis?

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Before the bailout I was skeptical that the bailout would 1) work as it said it would and 2) that it would carry its own unintended consequences. Looks like we're coming to those hard truths day by day as markets continue to resist being "stabilized."

I was also trying to understand another perspective of the argument against the bailout. How bad of a recession are we talking about without the bailout? While a lot of comparisons get thrown around that these are "the worst financial times since the great depression," I find it hard to believe that we should expect depression-like outcomes (food shortages, high unemployment, homelessness, etc) in today's economy. Today's economy is different from the 1930s, specifically with regard to the speed and flow of information. I doubt that large portions of the population would wander about desperately hoping to find jobs in a modern economy if only because there will be less waste and uncertainty as to where jobs are and are not available. Today's recession and the trials it erupts, has the luxury of being facilitated and powered through by a society that is extremely well connected to one another via telecommunications devices, the world wide web, and digital banking.

Times are tough, I better let my friend know about this marginally better job offer that he'd be good for. Times are tough, I know my uncle has a stable income maybe I could borrow a small loan from him instead of the bank.

John Stossel mentions, Landsburg for writing,

"Banks don't lend their own money; they lend other people's (their depositors' and their stockholders'). Just because the banks disappear doesn't mean the lenders will. Borrowers will still want to borrow, and lenders will still want to lend. The only question is whether they'll be able to find each other [A]s any user of can tell you, the technology for finding partners has improved since [the 1930s]."

I realize it sounds bizarre to say "we don't need banks we'll just use craigslist," but at the right margins it makes a lot of sense. Much of the world uses informal enforcement devices to secure borrowing and lending contracts because the formal and governmental sectors are weak and or corrupt in those countries. We could develop similar lending devices provoked by financial turmoil rather than bad or corrupt institutions.

In turn one would expect these channels to build up and develop into stronger institutions more resilient to unforeseen dilemmas in the future. After time and tested lending through the currently informal sector one would expect those channels to be better suited at dealing with economic fluctuations down the line.

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This page contains a single entry by Dan published on October 8, 2008 10:05 AM.

Another great piece on the bailout was the previous entry in this blog.

Poverty, Crime and Recessions is the next entry in this blog.

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