I don’t think I’d ever seen a bank run except in a Frank Capra movie. A bank run looks as bad in real life as it does on the movie screen. Today’s pictures from Moscow, showing people struggling to force open bank doors in a futile effort to save their life savings, were just painful to watch, and they were the most powerful reminders imaginable of just how fragile any money-based market system really is. Markets are not organic creations which flourish when left alone. They’re complicated constructions that depend upon a sort of willing suspension of disbelief, an acceptance that I’ll be able to use the piece of paper you give me today to buy a real good from someone else tomorrow. Once that compact is broken, it’s a long way to the bottom.
More than enough ink has been spilled on everything that the West and the Russian government have done wrong over the past seven years. But tactical errors aside, where the West really messed up was in underestimating just how difficult transforming the Russian economy would be. In the absence of a functioning civil society, and after seventy years of a non-market economy, any transition was bound to be painful. This is why many outside observers thought Russia would have been better off adopting an East Asian-style economic model rather than attempting to embrace Western-style capitalism overnight. But the truth is that Russia chose neither model. The Russian economy has become an easy target for those who argue that its uncontrolled chaos is the true face of capitalism in the raw. But it might be better described as the true face of a market society in which no one believes in the future. I’m not sure what you call that, but it isn’t really capitalism.
The bank runs of the Great Depression were eventually stopped by the advent of federal deposit insurance, while market crashes have been softened by the Federal Reserve Board’s injection of liquidity into the economy. In both cases, the existence of a lender of last resort has been essential. No such lender exists within Russia now, and since the IMF is both out of money and uninterested in giving Boris Yeltsin more money even if it had it, no such lender exists outside Russia, either. That may mean only that Russian citizens will have to endure the disintegration of their society, though that is awful enough. But while more than one TV commentator today reminded us that the market capitalization of the entire Russian stock market is just 5% of the market capitalization of General Electric (meaning that we shouldn’t be that worried about the impact of Russia’s woes on the U.S. economy), there’s one ineradicable difference between Russia and GE. Russia has six thousand nuclear warheads. How far can a country’s economy fall before it starts to think about the leverage that those weapons give it?
