Fear grips the system, which, in consequence, seizes. The resulting
collateral damage is wide and deep.’
Haldane suggested that the public typically respond to an outbreak
in one of two ways: flight or hide. In the case of an infectious disease,
flight means trying to leave an affected area in the hope of avoiding
infection. Because of travel restrictions and other control measures,
this generally wasn’t an option during the epidemic.[80] Had
infected people travelled – rather than being identified and isolated by
health authorities – it could have spread the virus to even more
locations. The flight response can also happen in finance. Faced with
a crash, investors may cut their losses and sell off assets, driving
prices even lower.
Alternatively, people may ‘hide’ during an outbreak, dodging
situations that could potentially bring them into contact with the
infection. If it’s a disease outbreak, they might wash their hands more
often, or reduce their social interactions. In finance, banks might hide
by hoarding money rather than risking lending to other institutions.
However, Haldane pointed out that there is a crucial difference
between hide responses in disease outbreaks and financial crises.
Hiding behaviour will generally help reduce disease transmission,
even if it incurs a cost in the process. In contrast, when banks hoard
money it can amplify problems, as happened with the ‘credit crunch’
that hit economies in the run up to the 2008 crisis.
Although the notion of a credit crunch would make headlines
during 2007/8, economists first coined the term back in 1966. That
summer, US banks had abruptly stopped lending. In the preceding
years, there had been high demand for loans, with banks making
more and more credit available to keep pace. Eventually, it had got to
the point where banks weren’t taking in enough money in savings to
continue lending, so the loans stopped. It wasn’t just a matter of
banks asking borrowers for higher interest rates. They weren’t
lending at all. Banks had reduced the availability of loans before –
there were several instances of ‘credit squeezes’ in the US during the
1950s – but some thought ‘squeeze’ was too gentle a word to
describe the sudden impact of 1966. ‘A “crunch” is different,’ wrote