what do you mean ‘the bank is out of money’?

This article highlights something which seems pretty obvious to me: it is a bad idea to leave an economic system at the mercy of frequently irrational human perception and emotion, and the current crisis is more a product of fear and anxiety as it is an actual reflection of an objective problem in the real world:

Markets, we are told, continually process available information to spit out accurate gauges of reality in the form of prices. That’s the theory. The reality: Markets are frequently inefficient, and dominated by humans, with all their frailties. “The view that people in finance are rational is wrong,” says Alex Edmans, a Wharton School of Business economist who studies behavioral finance. “They’re susceptible to emotion just like anyone.” In recent weeks, the emotions they have been expressing include anxiety, panic, rage, and resignation. In the Depression, skittish investors would cause runs on the bank by lining up on the sidewalk to withdraw cash. In the past several weeks, we’ve witnessed a 24/7 digital run on financial institutions as investors, banks, corporations, borrowers, and lenders worry that their assets simply aren’t safe. This panic has shown similar dynamics to previous ones. But because of the rapid shift in the structure of the global financial system, it’s also completely different. As a result, the amount of selling and declines are far greater than would be warranted by the erosion in the fundamentals. Call it the fear factor.

My personal view is that there is something inherently wrong with a system which permits ultra-short term speculation, and that one way to reduce the impact of perception and irrationality is to slow down the entire purchasing and, particularly, selling process. This would force investors to take the opportunity to consider reality in a composed and rational manner, rather than producing a fight-or-flight reaction to significant events.

Of course finance experts, merchant bankers and the ‘Business’ section of the Australian would no doubt tell me I have no idea what I’m talking about – but recent events tend to suggest that neither do they.