Some of the usual suspects were  advocating bank failure earlier this week on Bloomberg TV as a policy roadmap for success during economic and financial crises. It’s a convenient recommendation because the idea’s inherent contrarian drama offers a veneer of logic and provides an entertaining talking point for television. Saving bankrupt entities from the laws of free-market gravity, after all, is grounded in economic logic, common sense and a pro-growth agenda. All true… except when it comes to banks. This isn’t open for debate. Banks are different and must be treated differently when the grim reaper is knocking. Hundreds of years of empirical evidence speak loud and clear on this point. Learning from history isn’t on everyone’s agenda, however. But no matter how many times you insist that down is up, the historical record remains unchanged.

Perhaps the most compelling evidence that bank failure and laissez faire is an unusually hazardous concoction can be found in the succinct but powerful analysis of Yale Professor Gary Gorton’s book Misunderstanding Financial Crises: Why We Don’t See Them Coming:

Banks and bank debt were at the root of every one of the 124 systemic crises around the world from 1970 to 2007 (some also involved currency crises in which the value of the domestic currency decline precipitously). Indeed, there cannot be systemic crises without bank debt.

Letting banks fail has a long and tortured history. Allowing these institutions to implode and allowing the market to sort out the aftermath isn’t some idea that’s never been tested. Au contraire! Economic history is littered with examples of bank failure and the disastrous results that usually followed.

One of the more vivid examples struck the US in the early years of the 20th century.  The Panic of 1907 was at its core a banking crisis triggered by institutional failure. Such events had been a recurring blight on the US landscape in the preceding decades, although the 1907 version was unusually toxic. At the time, America had no central bank but all the usual troubles still applied, which led to the de facto creation of a lender of last resort by way of J.P. Morgan, who was dragged into the affair in order to forge a bailout package. The message: letting free-market forces reign supreme in banking is perfectly fine… until it hits you over the head.