05/14/2012 03:17 pm ET Updated Jul 14, 2012

Could a Greek Bank Run Go Global?

The biggest worry from Greece's potential departure from the euro is a global bank run. In recent years, Greece has experienced a major bank run. Indeed, in February, the Economist reported that Greek banks have lost 27 percent of their deposits since 2009.

But there are still, apparently, 150 billion euro in bank deposits held by the Greek banks and, no doubt, substantial other relatively short-term liabilities.

As the Greek government starts running out of money (the PM warns this will happen very soon) and continues to not play German ball, the Greek public will start running to get their euros, while the getting is still good. This is precisely the Argentine 2002 bank run scenario when that country could no longer maintain its peso peg.

The Greek government does not sit on 150 billion euros to insure Greek private bank euro deposits. And the Germans, under the scenario I'm considering, won't permit the ECB to continue pumping money into Greek banks just to see that money be spent on Greek government bonds.

So how will the specter of tens, then hundreds, then thousands, then tens of thousands of Greeks lining up in front of Greek banks look on every media outlet across the globe? And what will that picture tell Spanish and Italian and Portuguese and Irish depositors to do? It will tell them to run as well because they could be next. A decision, which would be inevitable, by Greek banks to freeze the public's deposits will make those in the other countries be even more concerned about the safety of their euros.

If bank runs in Greece spread to Spain, Italy, Portugal, and Ireland, they will then spread to Belgium and France and from there to other parts of Europe and, potentially, even the U.S.

This is a very low probability event. The European Central Bank, with German agreement, may try to draw a defensive line around the non-Greek PIIGS. But even deposit insurance in these countries, fully backed by the ECB, may not stop the bank runs. We have here two distinct equilibriums (economics jargon for outcomes). If the ECB insures deposits and no one runs, well, the non-Greek PIIGs live another day. If the ECB insures deposits and everyone runs, the ECB needs to print huge amounts of euros, which when they hit the street, will turn into hot potatoes, producing a massive inflation. At this point, anyone who hasn't run to get out her money before its purchasing power evaporates would be nuts.

The banking system as currently designed is unsafe at any speed. Fixing it requires going to Limited Purpose Banking discussed at, at, and in Jimmy Stewart Is Dead.