I read this article, and two days ago listened to this podcast from 'this american life' on npr. This article's arguments doesn't stand up against the pretty convincing descriptions of what's actually going on from the corporate treasurers and banking industry folk interviewed in the podcast. You should make an hour and listen to it--it's fantastic.
The author suggests that other institutions (pensions, universities, etc.) bring investors together with savers. It's true, but not to the same extent. Banks are primary. Drying up a majority of the way that it happens will have a drastic effect despite the fact that other ways exist.
The author argues that corporations get 25% of their investment funds from their own profits and that could go to 75% if they stopped paying dividends. The problem is that still leaves a 25% gap there which is sizable. Not only that, but profits don't help firms who are just starting up.
I'm not all doom and gloom about the economy (even today), but I don't think the importance of banks is understated. The author is essentially arguing that if we scraped the bottom of the barrel, we could probably replicate what banks do (bringing investors and savers together) to a certain percentage. That's true, but what if your work just started paying you 50%. It might be hard to meet your next month's bills.
Banks are much less important today than they used to be because there are so many more investment channels available. While regulation limits participation in these channels to the rich and well-lawyered, our economy is more redundant and diverse today than it has ever been.
there are so many more investment channels available
This is exactly why banks spend significant more money on advertising (think WaMu pre-death) than they used to. It's also why they derive a higher percentage of revenue from fees.
The shit will really hit the fan when your lights go out because your local power utility cannot get a shipment of fuel oil when no bank will guarantee their credit.
"Although banks perform an essential economic function — bringing together investors and savers — they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks playing any essential role."
Ummm... Pension funds invest in the stock market and they depend on banks to help themselves out. Same for univ. endowments and venture capitalists. Corporations still use banks to manage their cash flow and guess how they and everybody else flows their cash through? Banks!!!
If anything, the importance of banks has been highly understated.
PS. This does not imply the necessity of the bailout. The bailout is ultimately unnecessary. Wamu was still solvent from a cash flow perspective when the FDIC took over and even if some large institutions fail (as some already have), there are more than just three or four banks.
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=3...