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How Credible Is MMT? (Modern Monetary Theory)

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FBH said:
What else would you have it involve?
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Ensuring that a business failure is not actually ruinous for the people involved. One might for example conceive of some form of government assistance. We could call it employment insurance, for example. One need not engage in corporate crony welfare out of some kind of misplaced bleeding heart sentiment.

Still waiting for you to prove your point that lower rates of profit are produced by better functioning market BTW.
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I don't have time to go over the rock bottom fundamentals of economics with you at 4am. It's nevertheless true that the better functioning a market the lower profits are going to be; this observation goes clear back to Adam Smith. If you're asking for proof in the form of specific markets right now, a. it's 4 am and b. literally every single post in this thread has been theorycrafting, so you can shove off.
 
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FBH said:
Those would still seriously mess with the market.
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In what way? If once you get a job, you UBI goes, sure...it could create distortions. But In practice I'm unsure if it'd cause too many problems as people psychologically, have a NEED to work. Only a few are going to sit back and become "Benefit Queens" and people like that probably have underlying other issues as well.
 
HortonX25 said:
In what way? If once you get a job, you UBI goes, sure...it could create distortions. But In practice I'm unsure if it'd cause too many problems as people psychologically, have a NEED to work. Only a few are going to sit back and become "Benefit Queens" and people like that probably have underlying other issues as well.
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UBI doesn't actually go when you get a job under most systems, and would be more distorting if it did. In general, it might be expected to raise the cost of getting workers as people are less desperate for a job.

foamy said:
Ensuring that a business failure is not actually ruinous for the people involved. One might for example conceive of some form of government assistance. We could call it employment insurance, for example. One need not engage in corporate crony welfare out of some kind of misplaced bleeding heart sentiment.
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Those would also distort the market.

I don't have time to go over the rock bottom fundamentals of economics with you at 4am. It's nevertheless true that the better functioning a market the lower profits are going to be; this observation goes clear back to Adam Smith. If you're asking for proof in the form of specific markets right now, a. it's 4 am and b. literally every single post in this thread has been theorycrafting, so you can shove off.
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I'm not going to comment specifically on this, but it's pretty funny to see you attack Marx as discredited and Fringe and then nod along Adam Smith.
 
... yes, market fundamentals. If a market is perfectly functioning a business operating in it has next to, or outright, no profit margin, because competition and consumer awareness has forced them to bleed down to the bottom line to maintain a market presence. Charging more (and thus earning a profit) would cause people to stop buying their goods (since someone else would have a comparable good for cheaper, all an idealized market consumer cares about), charging less would put them out of business.

Profit is pretty close to a market failure in and of itself, sign that either there's still room for someone to compete or consumers are unable (due to physical restraints or lack of awareness) to pursue a more cost efficient alternative. Not quite that simple, but close enough for just-woke-up work. It's very much market theory 101. Basic as basic gets.
 
Frumple said:
... yes, market fundamentals. If a market is perfectly functioning a business operating in it has next to, or outright, no profit margin, because competition and consumer awareness has forced them to bleed down to the bottom line to maintain a market presence. Charging more (and thus earning a profit) would cause people to stop buying their goods (since someone else would have a comparable good for cheaper, all an idealized market consumer cares about), charging less would put them out of business.

Profit is pretty close to a market failure in and of itself, sign that either there's still room for someone to compete or consumers are unable (due to physical restraints or lack of awareness) to pursue a more cost efficient alternative. Not quite that simple, but close enough for just-woke-up work. It's very much market theory 101. Basic as basic gets.
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I think I do see the problem - the Marxist theory of declining profit posits declining gross profit, you're just talking about declining net profit.


I do think that market equilibrium is not necessarily a good thing, since it's very, very easy for businesses to collapse at that point thanks to minute market fluctuations. Obviously, there's the fact that it's impossible to attain or whatever and equilibrium is more of an analytical tool than a goal.

Where this ties into monetary theory is that this declining rate of profit underlies the Marxist theory of market collapses, with the implication that central banks are fundamentally unable to avert or really respond to market crashes in an effective and comprehensive manner.
 
Bhangbhangduc said:
Gross profit is total money made before people are paid, net profit is profit afterwards. Those should be the normal definitions.
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That's more or less correct, but I don't think it's the division that we're discussing, which is that of accounting profit v. economic profit.

Economic profit -- which is what I've been talking about and which I believe Frumple was talking about -- is revenue less every cost of earning it. Particularly and most relevantly here, it includes how much accounting profit you would have made doing something else.

Hence, an ideal market will have a zero rate of economic profit. If it has a positive one, then people can make more money in it than they can elsewhere, and so will enter the market until it returns to zero, and if it's negative, people can make more money elsewhere and so will exit the market until it again returns to zero. It follows that if it has a non-zero one it means the market is not an ideal one (or is in the process of correcting, but I believe we're generally talking about longer-term structural deviations).

It is very similar to the mechanism by which the marginal economic profit on selling any individual thing in an ideal market also goes to zero. Neither one of these requires the accounting profit to be zero -- in fact, they require it not to be -- but accounting profit elides very important incentives from the decision-making process.

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I feel like I've made this post before...
 
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foamy said:
That's more or less correct, but I don't think it's the division that we're discussing, which is that of accounting profit v. economic profit.

Economic profit -- which is what Frumple is talking about and what I've been talking about -- is revenue less every cost of earning it. Particularly and most relevantly here, it includes how much accounting profit you would have made doing something else.

Hence, an ideal market will have a zero rate of economic profit. If it has a positive one, then people can make more money in it than they can elsewhere, and so will enter the market until it returns to zero, and if it's negative, people can make more money elsewhere and so will exit the market until it again returns to zero. It follows that if it has a non-zero one it means the market is not an ideal one (or is in the process of correcting, but I believe we're generally talking about longer-term structural deviations).

It is very similar to the mechanism by which the marginal economic profit on selling any individual thing in an ideal market also goes to zero. Neither one of these requires the accounting profit to be zero -- in fact, they require it not to be -- but accounting profit elides very important incentives from the decision-making process.

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I feel like I've made this post before...
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We're thus discussing completely different things. The declining rate of profit simply describes a secular tendency for the average rates of the gross profits of all firms to decline over time. I brought this up because this has implications for monetary policy, which is the subject of the thread, to whit that in the long run no investments are profitable and that money created endogenously by private banks is, to a larger and larger extent, fictitious.
 
Cassiemouse said:
The theorem says that, if and only if, there are no externalities that markets are efficient, if and only if, markets are competitive then they are efficient, if and only if, there is perfect information, if and only if, markets are in equilibrium is the outcome efficient, etc. In all these cases we can see massive externalities to the point that the economy is all about externalizing costs on other people, a trend towards non-competitive structures, and a corporate structure that regularly throws the labor market out of equilibrium by it's very function. This is to say nothing about whether markets are fair or not which they are clearly not. Not to mention that markets only optimize for individual consumption rather than social consumption. We can see that public health care systems are more efficient than private health care systems, for example.
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All those conditions are qualifiers that are needed for free market to produce a Pareto efficient allocation of resources i.e., an equilibrium that maximizes the total of producer and consumer surplus. Markets can still be the good, effective, and efficient method for allocating resources even if none of these things hold true, it's just that there would potentially exist a better state of affairs than the current one. It isn't a binary of perfect competition=perfectly efficient market, imperfect competition however imperfect=horrendously inefficient market. Also, the fact that free markets optimize for individual rather than social consumption is just another way to say that externalities exist.
 
Bhangbhangduc said:
We're thus discussing completely different things. The declining rate of profit simply describes a secular tendency for the average rates of the gross profits of all firms to decline over time. I brought this up because this has implications for monetary policy, which is the subject of the thread, to whit that in the long run no investments are profitable and that money created endogenously by private banks is, to a larger and larger extent, fictitious.
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As accounting gross profit necessarily includes economic profit, it therefore follows that changes in economic profit will be reflected in it (all else equal). As most forms of market distortion tend to cause raises in economic profit it also then follows that a more efficient market will tend to reduce economic profit, and hence accounting profit as well.

It's also somewhat silly to say that an observed reduction in accounting profit over time -- even if true, for which the evidence is sketchy -- will either inevitably reduce it to zero or that all investments cease to be profitable. It is trivially possible to make money on investments in circumstances where profits are contracting as a whole, for example.
 
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Frumple said:
... yes, market fundamentals. If a market is perfectly functioning a business operating in it has next to, or outright, no profit margin, because competition and consumer awareness has forced them to bleed down to the bottom line to maintain a market presence. Charging more (and thus earning a profit) would cause people to stop buying their goods (since someone else would have a comparable good for cheaper, all an idealized market consumer cares about), charging less would put them out of business.

Profit is pretty close to a market failure in and of itself, sign that either there's still room for someone to compete or consumers are unable (due to physical restraints or lack of awareness) to pursue a more cost efficient alternative. Not quite that simple, but close enough for just-woke-up work. It's very much market theory 101. Basic as basic gets.
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Not accurate. I believe Foamy brought this up, but I think it needs emphasis. Assuming you mean profit in an accounting sense, you can very well make gross profit forever as a business, even in a perfectly functioning market. The caveat is that that gross profit will be no more than what you would have made simply renting your resources out (including your own services). So profit margin will still exist since there's still profit.

Profit is not abnormal in the long run--it is expected as long as you have resources worth something.

(You're correct for economic profit, but I don't think that's what you're talking about here considering profit margin is usually used in the context of accounting. Here's a link for the difference between the two types for anyone interested.)
 
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foamy said:
As accounting gross profit necessarily includes economic profit, it therefore follows that changes in economic profit will be reflected in it (all else equal). As most forms of market distortion tend to cause raises in economic profit it also then follows that a more efficient market will tend to reduce economic profit, and hence accounting profit as well.

It's also somewhat silly to say that an observed reduction in accounting profit over time -- even if true, for which the evidence is sketchy -- will either inevitably reduce it to zero or that all investments cease to be profitable. It is trivially possible to make money on investments in circumstances where profits are contracting as a whole, for example.
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DRP is not just an observed phenomenon, it's primarily a theoretical concept Marx developed that appears in Capital. It's not a collection of coincidences, it's structurally part of the system of capitalism itself.

For the record, this is why Marxists take some issues with the perspective of MMT supporters who think that there can be long-term government expenditures to keep the economy functioning. It's just the "what to do in a bust" side of Keynesianism adapted for an economy that's in constant bust.
 
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Aranfan said:
I was under the impression that the 2008 crash was straightfowardly an example of an underconsumption gap that was bridged by debt until suddenly the bill came due then demand collapsed as everyone focused on paying down debt? I may be misrembering Volume 2, but I recall that being thoroughly in that volume's wheelhouse.

But we are far afield of the topic by now, yes.

--

MMT seems to be a decent emperical model.
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The 2008 crash was rather fundamentally caused by the existence of a significant portion of the banking sector which was not covered by the FDIC and was thus vulnerable to a bank run. Then there was bad policy that propped up a bubble. After 9/11 Greenspan decided to print money at the fed because people were spooked and he didn't want the economy to collapse. Good idea, good plan, except he kept going. He kept going for far longer than he had to or should have, and then kept interest rates low for far too long.

During this time of extreme easy money caused by fed policy you saw people take out adjustable rate mortgages, where the interest rate on the mortgage would be able to change if interest rates went up. People who would not be able to pay back loans in anything but the most favorable circumstances were given loans, because interest rates were low and money was so cheap. The government also encouraged banks to give out home loans to low and middle income people, and weakened predatory lending laws. These mortgages were seen as less risky because they were backed by credit default swaps, and so the people making the mortgages could then sell them off to somebody else as an ostensibly safe investment.

The huge number of people buying houses (because easy credit) then drove up the price of housing, which contributed to a growing real estate bubble.

Eventually Greenspan pumped the breaks on the easy money and interest rates went up. Delinquency rates, which were already increasing, increased more. As the housing bubble collapsed many people owed more money than their house was worth and even if they could pay back the bank they would be better off simply losing their home anyway. The value of certain instruments suddenly plummeted, and people wanted to pull their money out of those risky instruments (Or whatever it was, there's a lot of way you could see this stuff result in depositors wanting to pull their money out, point is it caused a liquidity crisis). This caused a bank run as the banks were forced to call in loans to pay off the people withdrawing money, causing people to need to withdraw more money, etc. Except the bank run was in the shadow banking sector, where a majority of deposits were, and since the shadow banking sector was not backed by the FDIC that's how this actually happened. If it were backed by the FDIC people would not want to pull their money out of the banks in the first place because they'd know that even if the assets backing their deposits were threatened they'd still keep their money, meaning there wouldn't be a mass withdrawal and most of the bank failures that happened wouldn't have occurred at all.

Bubbles happen, but huge bank-run recessions are very rare. This was not a normal recession at all. 1929 was able to happen because large portions of the banking sector weren't covered by deposit insurance, the same happened in 2007.
 
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Erik Tiber said:
The 2008 crash was rather fundamentally caused by the existence of a significant portion of the banking sector which was not covered by the FDIC and was thus vulnerable to a bank run. Then there was bad policy that propped up a bubble. After 9/11 Greenspan decided to print money at the fed because people were spooked and he didn't want the economy to collapse. Good idea, good plan, except he kept going. He kept going for far longer than he had to or should have, and then kept interest rates low for far too long.

During this time of extreme easy money caused by fed policy you saw people take out adjustable rate mortgages, where the interest rate on the mortgage would be able to change if interest rates went up. People who would not be able to pay back loans in anything but the most favorable circumstances were given loans, because interest rates were low and money was so cheap. The government also encouraged banks to give out home loans to low and middle income people, and weakened predatory lending laws. These mortgages were seen as less risky because they were backed by credit default swaps, and so the people making the mortgages could then sell them off to somebody else as an ostensibly safe investment.

The huge number of people buying houses (because easy credit) then drove up the price of housing, which contributed to a growing real estate bubble.

Eventually Greenspan pumped the breaks on the easy money and interest rates went up. Delinquency rates, which were already increasing, increased more. As the housing bubble collapsed many people owed more money than their house was worth and even if they could pay back the bank they would be better off simply losing their home anyway. The value of certain instruments suddenly plummeted, and people wanted to pull their money out of those risky instruments, causing a bank run as the banks were forced to call in loans to pay off the people withdrawing money, causing people to need to withdraw more money, etc. Except the bank run was in the shadow banking sector, where a majority of deposits were, and since the shadow banking sector was not backed by the FDIC that's how this actually happened.

Bubbles happen, but huge bank-run recessions are very rare. This was not a normal recession at all. 1929 was able to happen because large portions of the banking sector weren't covered by deposit insurance, the same happened in 2007.
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You're putting a lot of work into not saying that it was a crisis caused by the market overvaluing assets and then being unable to sell them all.
 
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Bhangbhangduc said:
You're putting a lot of work into not saying that it was a crisis caused by the market overvaluing assets and then being unable to sell them all.
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It's the distinction between a cold and the flu, similar symptoms but different mechanisms, with the latter being significantly worse.

If you want an in depth analysis, I recommend The End of Alchemy by Mervyn King, who was the Bank of England Governor during the crash.
 
Bhangbhangduc said:
You're putting a lot of work into not saying that it was a crisis caused by the market overvaluing assets and then being unable to sell them all.
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That's just an incredibly reductivist take.


Origami Clock said:
It's the distinction between a cold and the flu, similar symptoms but different mechanisms, with the latter being significantly worse.

If you want an in depth analysis, I recommend The End of Alchemy by Mervin King, who was the Bank of England Governor during the crash.
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To be fair that book is kinda shit.

Major failing 1: Failing to Recognize an Easy, Tested Solution OR: Advocating Cutting your Fucking Arm Off Instead of Putting On Some Neosporin

They completely fail to recognize the option of providing deposit insurance charging risk-based premiums to the shadow banking sector, and instead discuss the asinine idea of banks being forced to carry 100% liquid reserves for their deposits, an idea which would massively impede economic growth and which ignores why the British banking system was successful, and indeed what actually makes a banking system good at its job. You see historically a bad banking system wasn't characterized primarily by crashes such as the Great Depression. No, instead their major marker was a lack of loans altogether and people keeping their money as cash under the mattress instead of putting it into banks where it can be loaned out, which results in a society where only those who already have money can make an investment, slowing economic growth and increasing income inequality and firm consolidation. You think inequality is bad now? Imagine a society where everyone has the same credit access issues faced by minority communities. Look at how cutting off access to credit hurt the black community, and you can see why this is a harmful state of affairs that we should not return to.

If you provided deposit insurance to the shadow banking sector there is absolutely no moral hazard so long as you charge the customers premiums based on the riskiness of their assets. First, we already know how to calculate the individual risk of the assets just fine, and this is the only type of risk that is actually affected by the actions of the banks. So long as we charge them premiums for individual risk, the banks will not be any more likely to engage in risky behavior due to government action. We are currently developing ways to calculate systemic risk as well, which can be charged to all the customers of the insurance, and even if this amount were off congress could simply pour some extra cash into the fund if it runs short. Essentially, what this system would result in is banks paying for their own bailouts ahead of time, with riskier banks having to pay more. Such bailouts would also be made far less necessary because you wouldn't see another bank run, which is what caused the crisis.

Deposit insurance for the shadow banking sector is always dismissed because of moral hazard despite the fact that charging risk based premiums (which is already done for the FDIC!) eliminates moral hazard, so it's a bullshit objection.
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Major Failing 2: What The Hell Is A Savings Glut

His whole handling of developed economies and abuse of the word 'disequilibrium'. He posits the existence of a 'savings glut', of people in the developing world saving too much money while people in the advanced economies accumulated more and more debt, leading to a 'disequilibrium' of some manner. Which is a term he is using incorrectly.

The End of Alchemy pg. 30-31 said:
When the world economy is functioning well, capital normally flows from mature to developing economies where profitable opportunities abound, as happened in the late nineteenth century when Europe invested in Latin America. A strange feature of the savings glut was that because emerging economies were saving more than they were investing at home, they were actually exporting capital to advanced economies where investment opportunities were more limited. In effect, advanced economies were borrowing large sums from the less developed world. The natural direction of capital flows was reversed- capital was being pushed 'uphill'.
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This thing here? Utter bullshit. Complete and utter shit. This 'savings glut' is simply developing world economies having more responsible actors that have a longer planning horizon and are more willing to save than in the west, especially in the US where overconsumption leads to people not saving enough money and there being less money for investment. The increase in savings in developing economies means that money gets loaned out. If not enough people are taking out loans at a particular interest rate and banks still have money left in the vault the interest rate will fall until it reaches the market clearing rate. Then that investment will go wherever returns are the highest (returns after accounting for issues such as risk etc), and this can be in developing countries or the West. There's no such thing as capital flowing 'uphill' here, the only reason capital even flows from advanced economies to developing ones is due to higher rates of return in developing economies. There is no issue of 'disequilibrium' here.
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Major Flaw 3: Why Are Interest Rates Low Anyway? I Dunno!

The author completely fails to recognize why interest rates were low in the first place. He somewhat implies, possibly, that it's due to a 'savings glut' pushing down interest rates too much and that it's just natural but that's stupid dumb and wrong, and he otherwise only recognizes the proximate causes of the crisis instead of underlying ones. Unless you count "Fractional Reserve Banking" as an underlying problem, which is stupid. No, Mervyn, it wasn't the Chinese that caused the low interest rates by saving too much and not spending money they don't have like those 'responsible' Americans, it's the fact that Greenspan printed money specifically to drive down the interest rate, then kept doing it, which set the circumstances for a bank run, which was able to happen because we had a large shadow banking sector which existed due to companies working around interest rate ceilings during the 70's, and which were even vulnerable to a bank run because they lacked deposit insurance because the FDIC is fucking stupid and the FDIC head doesn't understand the fucking premium formula used by his own goddamn company and doesn't GET that risk-based premiums prevent moral hazard!
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Major Flaw 4: Why Aren't Low Interest Rates Helping?! OR: Mervyn Basically Forgets that the Federal Reserve is a Thing

They aren't loaning out money because the fed is charging interest on excess reserves. Basically the banks are required to hold like 10% of their assets in liquid reserves (or whatever, the figure's somewhere around there). The Fed provides them with interest on these required reserves. Excess reserves are any reserves held by the bank which exceed this minimum balance. Normally these don't get any interest from anyone because they're essentially just cash left sitting around doing nothing and not being loaned out. However, after the 2007 crisis the Fed took the unprecedented move of providing interest to banks on their excess reserves. This was useful immediately after the crisis to recapitalize the banks, and it encouraged them to hold more reserves than the minimum (especially combined with low interest rates). The Fed also took to printing money (buying treasury bills from banks, so fed gets T-bills and banks get cash, banks loan out cash and it goes through the money multiplier, money is thus created). This was to push down the interest rate and stimulate the economy, because banks would have more money to lend out, investment would go up, that drives economic growth. Printing money also prevents deflation from occurring, which is a big part of why the Great Depression was so nasty. And because of interest on excess reserves, a lot of that money being printed by the Fed was staying in the bank vaults, which restored a healthy level of reserves and this also helped to restore confidence in the banking system. Just one issue. There's still no deposit insurance on the shadow banks.

Imagine if, after the Great Depression, the FDIC was just never created. The Great Depression was caused by a bank run, and once FDIC insurance was provided that basically eliminated the vast majority of the motivation for any possible bank runs. If FDIC was not provided then confidence is still shaken, you don't get lending going out, the economy recovers more slowly, and you're gonna have another bank run sooner than 2007.

2007 hits, shadow banks don't have FDIC and have a bank run, and they hold most of the banking deposits in the economy. The Fed recapitalizes the large banks and provides them interest on excess reserves. Essentially this acts as ad-hoc (and post-hoc) deposit insurance to restore faith. The issue is, when you pay banks to not loan out money they loan out less money. Who would have thought.

Banks didn't loan out as much money, which is part of the point, but now this means that the money printed by the fed isn't stimulating the economy like it should. This resulted in our stagnant recovery, because again, money not being loaned out, impeded investment, reduced effect from the Fed's stimulus. Why is the Fed doing this?

Because inflation and the lack of deposit insurance. The FDIC could do its fucking job like it's supposed to , but muh moral hazard, so we need shitty adhoc deposit insurance to provide security in place of the limp-dicked FDIC, and one of the Fed's main missions is to keep down inflation. Why is that an issue? Well, since the Fed has been at this for a few years, low interest rate plus paying the banks to keep the money without loaning it out, a lot of that money is not circulating and is sitting around doing nothing. Essentially the same as if it didn't exist, in terms of the effect on inflation. Well. Imagine those years of built-up cash all start getting spent at once when the Fed reduces interest on excess reserves. You'd have like 5% inflation for a couple of years, maybe a few percent more, whatever. Point is, the inflation hawks would whine all over national television and a gaggle of fuckwads in Congress would accuse the Fed of not doing its job of keeping down inflation which it is by law required to do. So the Fed just puts it off, and in doing so the wad of cash builds up more and more.

I'm going to use a metaphor employed by my professor.



This snake is the US economy. That bulge is the fat wad of cash the Fed gave to banks. That economy is gonna take a few years to digest all that cash because holy shit that's a lot of cash at once you don't see that every day. So it takes a few years, and during it there's a bit of extra 'inflation' while the cash is 'digested'.

In conclusion, Fuck Ron Paul, Fuck Sarah Palin, Fuck the FDIC, and Fuck Greenspan. And Bernanke, I love you bro, but you really should have done something about this before you left the Fed.
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The book is good at looking nice and seems intuitive and appealing, and I went along with it at first, before some of the logical holes were pointed out to me. Like, okay, look, private banks? They're not printing money. Well, they technically are, but we already know what the money multiplier is in this economy, and this is factored in when deciding shit, and the private banks only 'print money' when the central bank gives them cash in the first place, so whatever. Also that whole spiel over money flowing uphill.

HortonX25 said:
Seeing the main point is that Greenspan was dumb? That's government failure if anything, not market failure.
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Bank runs are inevitable unless you provide deposit insurance. Like sure you can blame the market, but that's like blaming the weather for Katrina. The market's gonna do it's thing, it's not gonna act differently, and the government should have prepared for this.

Greenspan is only the proximate cause. He caused a housing bubble. If the FDIC had done its fucking job and provided insurance to the shadow banking sector before the crisis this housing bubble wouldn't have caused a bank run. If Greenspan hadn't fucked up we'd have just seen the crisis be delayed by a few years or a decade until something else happened to spark a bank run.
 
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Erik Tiber said:
we had a large shadow banking sector which existed due to companies working around interest rate ceilings during the 70's
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I haven't heard this before. I was under the impression that shadow banking existed mostly because the FDIC has low (relative to the needs of a large business) limits on coverage. Is there a good summary somewhere?
 
Erik Tiber said:
That's just an incredibly reductivist take.
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It's actually not reductivist. Calling Greenspan an idiot and leaving it there is, because it reduces the question of "why did 2007-2008 happen" from the complex structural economic risk that existed and still does in the economy to "one guy was bad at his job."

I'm not even necessarily disagreeing with you fully on the proximate causes of the Recession, but I'm actually advancing it one piece further. You posit a bank run in the shadow banking sector, and all I'm pointing out is that bank runs cannot occur if banks can cover their obligations. Banks could not cover their obligations because they invested in mortgage-backed securities which declined in value, and these securities declined in value because, fundamentally, the assets they represented were overvalued.

The government was supporting policies throughout the period leading up to the recession which increased household consumption at the cost of debt. Mortgages fueled consumption which fueled demand, but the whole house of cards was propped up by the idea that assets would continue to grow in value.

That's why the recovery has been so sluggish - the secular decline in consumption that was being obscured by this debt-based system has been unmasked.
 
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