It Doesn't Give People Confidence
This lack of confidence trickles down. More than one person has asked me if they should pull all their cash out of their bank accounts in case the bank fails (these accounts all have less than the FDIC-insured $100,000 limit). That’s absurd; at this stage we’re not even approaching the possibility the government could not back the FDIC. Heaven help us if it comes to that. However, that some entertain the possibility of uncontrollable bank runs shows just how deeply a lack of confidence has permeated. ~Free Exchange
Of course this fear is absurd, but a key reason why your ordinary depositor might begin to think this way is that all of the learned, serious experts are intoning gravely that we are on the eve of Armageddon. I wonder why confidence might wane when all of the people who claim to know the most about what’s going on are declaring that the end is nigh. Bailout supporters are doing their best to instill unreasoning fear in the minds of the public and their representatives to stampede them in the direction of taking action, but I would bet that this political panic is contributing directly to the general loss of confidence. As the loss of confidence spreads because of alarmism, I can imagine that the political panic could lead to a worse financial panic than might otherwise be the case.
Update: Not surprisingly, alarmism and rumors are already creating undesirable results. If depositors in Hong Kong are spooked by Lehman’s bankruptcy, despite the reality that it does not directly affect them, the loss of confidence has as much to do with what people perceive and mass psychology as it does with the soundness of their institutions and the availability of credit.