Economy almost collapsed in September

[there_is_no_bob]

I found out about it here (http://scienceblogs.com/mikethemadbiologist/2009/02/if_the_global_banking_system_n.php?utm_source=sbho mepage&utm_medium=link&utm_content=channellink)

I, huh, what? Did this make the news anywhere?

I was there when the secretary and the chairman of the Federal Reserve came those days and talked to members of Congress about what was going on... Here's the facts. We don't even talk about these things.

On Thursday, at about 11 o'clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two.

The Treasury opened up its window to help. They pumped $105 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks.

They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened.

If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would have happened if that happened. It would have been the end of our economic system and our political system as we know it.

[Hatter]

I remember that being in the news, though not quite that level. Just that the Treasury had to step in to stop a panic.

[Limper]

I'd imagine the reluctance to go on at length about it would be that even with intervention it may have become self fullfilling. Panic and fear are nasty to the system.

[Northcott]

I'd imagine the reluctance to go on at length about it would be that even with intervention it may have become self fullfilling. Panic and fear are nasty to the system.

Truth. And that is some scary, scary shit.

[Name Lips]

I think that's what my inlaws (we've started calling them the "outlaws" around here) thought was going to happen when they were desperate to escape the city. They just missed the memo that global economic Armageddon had already happened, and the good and noble heroes at the Fed swooped in at the nick of time to save the day.

[AZRogue]

I've noticed, lately, that I've heard how bad things are from so many sources, so many times, and seen such dire predictions repeated for so long, that my natural contrariness has kicked in. Now I just think I'm SUPPOSED to be afraid, seeing as how so many sources are spending so much energy telling me so, and I ain't buying!

More a comment on my tin-foil-hattish tendencies, I guess, than anything else. :)

[Hatter]

I've noticed, lately, that I've heard how bad things are from so many sources, so many times, and seen such dire predictions repeated for so long, that my natural contrariness has kicked in. Now I just think I'm SUPPOSED to be afraid, seeing as how so many sources are spending so much energy telling me so, and I ain't buying!

More a comment on my tin-foil-hattish tendencies, I guess, than anything else. :)

The problem is that consumer fear tends to lock the system up more. People like myself have uncertainty about their financial future and are not spending money which causes the markets to falter and cause financial problems which causes more insecurity and less spending which worsens the markets and so on in a spiral that leads to inevitable collapse unless someone changes the perception of the future.

[Name Lips]

People like myself have uncertainty about their financial future and are not spending money which causes the markets to falter and cause financial problems which causes more insecurity and less spending which worsens the markets and so on in a spiral that leads to inevitable collapse unless someone changes the perception of the future.
I've always said that the absolute worst fate that could befall America is widespread frugality. Can you imagine how quickly it would all come tumbling down if every one of us only bought what we needed, and what we could actually afford with money on hand?

[Ancalagon]

I've noticed, lately, that I've heard how bad things are from so many sources, so many times, and seen such dire predictions repeated for so long, that my natural contrariness has kicked in. Now I just think I'm SUPPOSED to be afraid, seeing as how so many sources are spending so much energy telling me so, and I ain't buying!

More a comment on my tin-foil-hattish tendencies, I guess, than anything else. :)

Oh, you mean like this?

http://en.wikipedia.org/wiki/Disaster_capitalism

Create a crisis, freak people out, and then they will let you do anything?

I've always said that the absolute worst fate that could befall America is widespread frugality. Can you imagine how quickly it would all come tumbling down if every one of us only bought what we needed, and what we could actually afford with money on hand?

What kind of insane system are we living in that this is NOT how people should live?!? There are tremendous amount of people with not enough. Why should the world economy rely on people who have more than enough spend too much?

[Limper]

Oh, you mean like this?

http://en.wikipedia.org/wiki/Disaster_capitalism

Create a crisis, freak people out, and then they will let you do anything?

It worked for Bush.


What kind of insane system are we living in that this is NOT how people should live?!? There are tremendous amount of people with not enough. Why should the world economy rely on people who have more than enough spend too much?

Good question. I know the situation came about during the Boomers but have no real idea how or why.

That demographic has produced a lot of strangeness and damage.

[The Winslow]

What kind of insane system are we living in that this is NOT how people should live?!? There are tremendous amount of people with not enough. Why should the world economy rely on people who have more than enough spend too much?

Because it creates jobs for people who don't have enough, so they get to have enough. In theory.

[Northcott]

What kind of insane system are we living in that this is NOT how people should live?!? There are tremendous amount of people with not enough. Why should the world economy rely on people who have more than enough spend too much?

People only lived that way until the advent of the mortgage. The lure of a house was too much, and it created an entire credit industry, where owing money became the norm rather than the exception.

[Name Lips]

Look around. Almost everything you see was built on loans. People get loans for their houses and cars. If you're not taking out loans for your house or car, the person who first bought it did. All the buildings and businesses you see were built from loans. Land is purchased through loans. I could get a truly awesome computer if I'm willing to pay $50 a month for it instead of buying it outright. Most businesses use loans to finance their payrolls. A huge portion of government spending is financed through issuing debt. Without loans there would be no interest rates, no investment, no banking, no Wall Street.

America is in a very real sense completely built out of loans. All of our wealth, power, and influence arose from the power of loans. It's not a recent thing.

The problem we ran into is that the banks got too greedy. They gave out loans to more and more people, assuming the economy would keep booming and that overall these risky investments would pay off. Everything reached a critical mass... then imploded.

[Freedom Canadian]

People only lived that way until the advent of the mortgage. The lure of a house was too much, and it created an entire credit industry, where owing money became the norm rather than the exception.

Debt is not a problem if it's contracted for a (sound) investment. One you can afford to repay, of course.

It's when you borrow to buy transient shit that you get in trouble.

[Utrecht]

The problem is that consumer fear tends to lock the system up more. People like myself have uncertainty about their financial future and are not spending money which causes the markets to falter and cause financial problems which causes more insecurity and less spending which worsens the markets and so on in a spiral that leads to inevitable collapse unless someone changes the perception of the future.

This is one of the reasons that I find Obama's approach to the economy to be so interesting.... using words like "catastrophe" and "dire" dont help consumer confidence.

I wish he would talk up the positives - and leave the negativism to congress.

[Northcott]

Debt is not a problem if it's contracted for a (sound) investment. One you can afford to repay, of course.

It's when you borrow to buy transient shit that you get in trouble.

I agree! But it's also human nature, unfortunately. Give them an easy solution, and it will be abused until trouble rises up. Until big trouble rises up, that abuse will spread from a smaller portion of the population to the greater, until the impact is observed and serves to temper the fevor.

The growth of the loan industry from basic mortgaging provided a tool, but one that we're still relatively new to using. In the grand scheme it's only been around for a very short while. Yes, there've always been loans of one sort or another, but making them an ingrained part of a social structure on this scale is (I think) a recent phenomenon. So we're getting bit in the ass periodically. Hopefully we'll learn.

Which brings us back to Name Lips notion that loans built the USA (and Canada, really... and much of modern Europe). This is undeniably true. However, I'm left to wonder how much of that is credit toward loans, and how much is fault. It's doubtless enabled some advances in technology and infrastructure, but how much of it has it prevented? How much has easier access to to loanable cash inflated our economy?

Technically -- ideally -- things should balance out in a free market. Demand and supply create a median wherein a fairly justifiable cost for services or items is created. Excessive perception of demand can inflate that into a bubble, which is problematic enough. As can monopolistic holds. But so can available credit, as there is now a larger cash pool for purchases and payments to be made. Net 30 is a common payment practice in business.

I think it's been, generally speaking, more positive than negative, but there's really no way to prove that. We can only guess how our society would have developed with a more frugal system in place. Might be we'd be at a similar point with a more solid economy... or it could be our technology would be thirty years behind and we'd be fucked anyway.

[Hatter]

This is one of the reasons that I find Obama's approach to the economy to be so interesting.... using words like "catastrophe" and "dire" dont help consumer confidence.

I wish he would talk up the positives - and leave the negativism to congress.

Bush tried this tactic, but when what you say doesn't match peoples perceptions and what the media is saying you're left with a severe credibility problem.

[Random Encounter]

My dad sent me this video. Apparently the idea that our country, or at least all the money in it, is built of loans has a very real basis. The video gets downright paranoid in parts, vast global conspiracy type stuff, but it's still an interesting look at banking and how money is created, basically, out of thin air and not by the government as most people would assume.
http://video.google.com/videoplay?docid=-9050474362583451279&hl=en

Of course I'm not sure how much of this to believe. I already think the implications that presidents who have discussed nationalizing our banking system were assassinated because of it, is beyond ridiculous. But some of what was said seemed backable by verifiable facts, I just haven't verified them.

[Hatter]

So it seems that Kanjorski is probably full of shit.

Link (http://www.portfolio.com/views/blogs/market-movers/2009/02/11/kanjorski-and-the-money-market-funds-the-facts?tid=true)

Kanjorski and the Money Market Funds: The Facts

With the Kanjorski Meme still spreading (see Ben Smith, Andrew Leonard, Moldbug, and more), I think I'm finally able to squash it with some hard figures: there never was a $500 billion outflow from any asset class in the space of a couple of hours or even weeks, and the Fed never shut down or froze any money-market accounts.

This is not the first time that Kanjorski has made these allegations. But first, it's worth going through the timeline.

On September 15, Lehman Brothers failed. The Reserve fund -- which was $64 billion that morning, and which had a substantial investment in Lehman debt -- saw $10 billion of withdrawals that day. The following day, September 16, it saw another $10 billion of withdrawals; on September 17, when withdrawals had reached a total of about $40 billion, it announced that redemptions would take "as long as seven days"; as we all know, that was massively overoptimistic.

The news from The Reserve was gruesome, and total withdrawals from money-market funds reached $104 billion that day, according to Crane Data. Another data provider, ICI, says that as of the close of business on the 17th, money-market funds had a total of $3,549.3 billion, which was a fall of just $30.3 billion from their level a week previously.

The following day, September 18, was bad but not quite as bad, with withdrawals of $57 billion, according to Crane Data. By the 24th, according to ICI, the total was $3,456.2 billion -- a drop of another $93.1 billion from the 17th.

On September 19, worried about outflows from money-market funds, the Treasury announced that, for a fee, it would guarantee -- not freeze -- eligible money-market mutual funds. But the details of the plan still weren't clear as of September 21, when Treasury said it was "continuing to develop the specific details surrounding the temporary guaranty program".

Substantially all of the outflows came from institutional accounts: retail investors never panicked. If you look at the weekly data for bank savings deposits, including money market deposit accounts, they stood at $3,167.4 billion on the 15th, and rose to $3,191.4 billion on the 22nd.

So where does the $500 billion outflow number come from? Would you believe: the Sunday New York Post, which on September 21 published a story headlined "Almost Armageddon" featuring this paragraph:

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening [on Thursday]. The total money-market capitalization was roughly $4 trillion that morning.

Remember where we're at here: the end of the longest week in financial-market history, when no one -- traders, reporters, Congressmen, you name it -- was getting much if any sleep. Simple errors can easily be made, numbers can get fuzzy, everything was moving very fast and confusingly.

In any case, three days later, on September 24, Kanjorski held a hearing on Capitol Hill with Treasury secretary Hank Paulson. Here's what he said:

I was talking to someone, one of my friends on Wall Street today, asking him to verify the money market run. It was anonymously reported in some of the New York papers, and I think I have evidence of it in some of our conversations, whether it was with you or with other experts, that between 11:00 and 11:30 on Thursday last, the money markets in the United States were hit by a run that amounted to about $500 billion of $4 trillion in accounts and that as I understand it, it was essential for the Federal Reserve to pump $105 billion into the system and to suspend operations or the money market accounts of the country would have, in fact, failed.
One, you should tell us that.

Kanjorski is clearly fishing here: he's talking about anonymous newspaper reports and vague "conversations" and anonymous Wall Street "friends", and basically asking Paulson to confirm his suspicions. Which, naturally, Paulson doesn't do, because the suspicions weren't actually true. That said, however, Paulson's being-polite-to-the-Congressman answer doesn't explicitly say that Kanjorski's numbers are false.

After that, we didn't here much more about this meme until Kanjorski resuscitated it on C-Span, this time citing the Federal Reserve as his data source, and beefing up the numbers for good measure:

On Thursday at about 11 o'clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the United States to the tune of $550-billion was being drawn out in in a matter of an hour or two...
We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. ... If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.

This is all, frankly, fiction, and it's not clear where most of it came from, although maybe Kanjorski's "friends" on Wall Street are the same people as Michael Gray's sources at the New York Post. Thinking back to that crazy week it's easy to get details wrong, especially when you're speaking off the cuff on a call-in show. But let's stop treating it as though there's any substance to it. Please.

[Freedom Canadian]

My dad sent me this video. Apparently the idea that our country, or at least all the money in it, is built of loans has a very real basis.

All the money, sure.

Most people confuse money and wealth. Sure, at the individual level, they are the same thing. But the US' wealth is not the sum total of money owned by its people, corporations and governments. It is its infrastructure, its products and services. It is made of roads, cars, food, haircuts, knowledge and stuff. In other words, people working (when the work in question is productive anyway). Money is only a way to distribute the wealth and its benefits.

Loans do increase the amount of money in the economy, but by itself they don't increase the amount of natural resources, workforce or knowledge a country has. Thus, wealth is not solely built out of loan.

For example, you can print new money and double the amount of dollars in the economy, but that economy is not going to be wealthier. It just means that dollars will be worth fewer eggs and ounces of gold than before. Likewise, you can loan money to people and create money that way, but that is not going to create wealth. It just means that existing wealth is going to be spread thinner.

Now I don't mean to imply that monetary crises don't have any effect on wealth at all. After all, if wealth is created by people working and the factory closes from lack of consumers, then there is a link between debt and wealth creation. I'm just not convinced that borrowing money to buy more crap is the answer.

[Ancalagon]

well, I'm sort of reassured that it wasn't that "close"...

[PWD]

well, I'm sort of reassured that it wasn't that "close"...

I'm sort of reassured that however bad a situation, there are politicians out there willing to spin it worse to try and make hay.

Reassured that there'll always be someone worth putting up against the wall when the revolution comes, that is. :)