MEGAN MCARDLE: Banking Without Risk Is Impossible.

The fundamental fact of a banking crisis, which is different from a crisis in any other industry, is that if people believe a financial institution to be bankrupt, it actually is bankrupt. As Arnold Kling puts it, banks exist to reconcile the desire of households to lend short and borrow long — we want to have bank accounts we can empty at any time we want, but we want mortgage loans that carry fixed payments and last for decades. In financial parlance, the bank accounts are liquid — it’s easy to turn them into cash — and the mortgages are illiquid; if I want to get my money out, I have to find someone who wants to buy a mortgage on your house.

This creates a vulnerability at the heart of modern banks: If too many depositors try to turn their bank accounts into cash at the same time, the bank will be insolvent, because it cannot liquidate the mortgages fast enough to pay the depositors. And when are you most likely to get a flood of people trying to empty their accounts? When they think the bank is insolvent. So people who fear that their bank will go bust can actually produce that result, even if the bank is perfectly sound. Worse, if that bank fails, customers at other banks may panic, triggering a nationwide collapse.

This is unique to finance. That’s why I didn’t support the bailout of General Motors Co.: As I put it at the time, if GM went bankrupt, my mini was still going to start the next morning when I put the key in the ignition.

Actually, my old Sonic Foundry software quit working when they sold out to Sony and shut down the authentication servers. But point taken.