29 March 2010
Editor, The New York Times
To the Editor:
Paul Krugman writes that "we used to have a workable system for avoiding financial crises, resting on a combination of government guarantees and regulation. On one side, bank deposits were insured, preventing a recurrence of the immense bank runs that were a central cause of the Great Depression" ("Punks and Plutocrats," March 28). This claim is misleading.
Bank runs don't just happen; they have causes. In the 1930s those causes were serious missteps by the very institution - government - that Krugman wants to invest with even more power.
First, regulation limited branch banking and, hence, prevented banks from sufficiently diversifying their portfolio of deposits. Second,
Mr. Krugman's enthusiasm for more government control over the financial system would likely be muted if his history weren't so potted.
Donald J. Boudreaux
Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser.