The Pettis Banking Theorem

This is from Michael Pettis’s China Financial Markets. It should probably be like the Pledge of Allegiance used to be in school, a required recitation before the meeting of any bank board of directors.

I guess it is time to introduce something that I might call the Pettis Rule of Banking (although I am way, way down on the list of people who first thought of this):  “It is not even theoretically possible that in a banking system in which bankers are given unlimited liquidity, tremendous pressure to make loans, and an implicit guarantee against losses, that enormous amounts of bad loans will not be made.”

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