For more than a week, French motorists have been facing a fuel shortage situation following strikes in several refineries. The news of the past week was also marked, in a much more discreet way, by the presentation of the Bank of Sweden prize in honor of Alfred Nobel to three American economists for their work on banks and financial stability.
If these two events have a priori nothing in common, the work of Douglas Diamond and Philip Dybvig, recipients of the prize alongside Ben Bernanke, former president of the US Federal Reserve (Fed), shed some interesting light on the current situation in France.
In 1983, Diamond and Dybvig wrote a seminal article which made it possible to understand that what makes purpose of banks is also a source of their fragility. The existence of banks is explained by their role as intermediaries between savers and borrowers. The former seek to place their savings in safe and liquid investments, ie available at all times. Borrowers need funds, mobilized for a long enough period, in order to invest.
In the absence of bank, it is impossible to transfer the surplus savings to the borrowers due to different time frames. Banks ensure this intermediation by collecting the savings available in the short term to lend them in the long term. By carrying out this transformation of maturity, banks contribute to investment and therefore to economic activity.
Diamond and Dybvig have shown that this intermediation activity is also what makes banks intrinsically fragile. The banks are structurally in a position of illiquidity because part of the savings is not available in the short term since it is lent in the long term. Normally, this situation does not pose a problem. Only a limited portion of total savings is withdrawn daily. Banks are therefore not obliged to dispose of all the savings placed by depositors.
Diamond and Dybvig are interested in situations of bank runs during which many savers will want to withdraw their savings at the same time, putting the banks, and even the banking system, in difficulty. The origins of these bank runs are multiple, ranging from doubts about the solvency of a bank to political decisions such as in Cyprus in 2013 when the government wanted to tax deposits.
The interesting point of Diamond and Dybvig's analysis is to show that even if withdrawals initially concern only a limited number of savers, they can induce a rush to the counters of all depositors due to self-fulfilling prophecies and lack of coordination. Suppose that a proportion of savers decide to withdraw their deposits. If other depositors begin to doubt the bank's ability to meet withdrawal requests, then it is rational for them to withdraw their deposits. If these depositors arrive too late, they will no longer be able to access their money since the withdrawal principle is that of the queue (first come, first served).[Nearly 80 readers trust The Conversation newsletter to better understand the world's major issues. Subscribe today]
From then on, all depositors will rush to the bank counters to withdraw their deposits. The bank will not be able to meet all these demands and it will find itself faced with a situation of illiquidity which may even turn into a solvency risk (if the bank has to sell its assets urgently to obtain liquidity). It is possible that the phenomenon will quickly spread to other banks, for example if depositors who have accounts in several banks withdraw their funds from other banks.
Although this model is very simple, it sheds some light on the current shortage of fuels. The shortage is explained primarily by the strikes that have impacted several refineries. Nevertheless, the strikes do not explain the ruptures observed in several service stations, particularly in areas initially not served by the closed refineries. One explanation for the shortages lies in the phenomena of self-fulfilling prophecies, revealed in the Diamond and Dybvig model.
The “Nobel” solutions…
As in the case of banks, gas stations only have a limited amount ofgasoline and the principle that applies is that of the queue. Faced with the alarming news, many motorists anticipated an inability of the stations to be able to serve everyone. They rushed to the pumps even though their needs were limited, depleting stocks and creating a situation of de facto shortages.
It is useful to push the analogy a little further by studying the proposed solutions put forward (or ignored) by Diamond and Dybvig to see how they might apply in the case of fuel shortages. The two economists offer two solutions to counter the rush to the counters.
The first solution is an insurance system that allows each citizen to have their savings covered in the event of the bankruptcy of their bank (100 euros per bank and per depositor within the European Union). The objective of this device is above all preventive, to prevent panic from appearing, but proves useless as soon as the crisis has materialized.
The second solution is more useful in case of panic. It consists of preventing agents from withdrawing money beyond a certain threshold. In practice, this solution took the form of a withdrawal ceiling amount. A similar solution has been applied in some service stations by limiting the maximum capacity during each fill-up or by prohibiting the filling of ancillary tanks. The risk is then that “panicked” motorists multiply their trips to the pump.
A solution closer to the Diamond and Dybvig model would be to implement “fuel vouchers” which would be attached to each motorist or vehicle and could be modulated according to the activities (priority or not), even with the possibility of being exchanged. This solution is perhaps theoretically attractive but remains technically very difficult to implement in such a short time.
… And the others
It is also interesting to study solutions not considered by Diamond and Dybvig. The authors ignore the role of money creation in their analysis (which is a limitation of their model). In the face of liquidity crises, the central bank can inject liquidity into the banking system in order to give banks oxygen.
With regard to gasoline, the government has thus started to use strategic stocks in order to reduce the tension. Nevertheless, the analogy with the banking system has its limits. Unlike central bank money, fuel is not created ex nihilo. This solution therefore implies reducing these stocks with the risk of being deprived if the crisis persists.
Finally, it is useful to ask why economists have not thought of price regulation. A solution to both problems would be to modify the method of resource allocation according to a principle of price rather than rationing (queue). Concretely, banks could charge withdrawals in proportion to the amount withdrawn or play on the price of fuel.
It also appears that prices at the pump have risen since the start of the shortage, particularly in the most tense areas.
This solution has two essential limitations. On the one hand, raising prices is politically explosive in the current situation ofinflation. This choice would amount to giving priority to the wealthiest at the risk of increasing tensions and therefore the origin of the problem. On the other hand, it is doubtful that price regulation is the best tool in a panic situation, when economic incentives lose their effectiveness.
The lived experience could be used to anticipate future crises in order to curb as quickly as possible the phenomena of self-fulfilling anticipations which are at the heart of the current difficulties.
Florian Leon, Research officer at the Foundation for Studies and Research on International Development, University Agency of La Francophonie (AUF)
This article is republished from The Conversation under Creative Commons license. Read theoriginal article.