Did the world almost come to an end Sept. 18th?

I've had so many of you write me and ask me what I think of this blog post.  The main claim is taken from Paul Kanjorski:

On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous
draw-down of money market accounts in the U.S., to the tune of $550
billion was being drawn out in the matter of an hour or two. The
Treasury opened up its window to help and pumped a $105 billion in 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 out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S.,
would have collapsed the entire economy of the U.S., and within 24
hours the world economy would have collapsed. It would have been the
end of our economic system and our political system as we know it.

The second paragraph is very much overstated (and I wonder about the exact numbers in the first paragraph).  My personal guess — and guess is the right word — is that if nothing had been done on this day, a disaster would have resulted, though not on the scale postulated here.  In my view there would have been an immediate bank holiday, partly improvised, plus complete insolvency for some very large financial institutions, followed by rapid nationalization.  There would have been a much tougher whack to the commercial paper market than what we saw.  Many businesses would have had problems meeting short-term payroll requirements.  The downturn in the real sector would have been much steeper than it has been.  In short, it would have been very bad but not the end of the world economy or democratic capitalism. 

Comments

There must be some other source to confirm or deny Rep. Kanjorski's account of what happened on 9/18. Ben Bernanke has failed to give any explanation of what happened that day. He's the one that should talk.

Tyler wrote:

Many businesses would have had problems meeting short-term payroll requirements.

Not playing "gotcha" here, but I wonder: Do you actually know that that's the case? Through my own informal inquiries, in addition to the more systematic work done by David Henderson and others, I came to the conclusion that this was a bogus fear invented by Paulson et al.

The actual businesspeople I talked to said either (a) what kind of a business needs to borrow money every month to pay its employees, and (b) even if it did, if it had a clean balance sheet it could have obtained financing.

So I'm wondering, do you actually know businesspeople who said they were having trouble borrowing money to pay their employees?

Seems both sides of the tale had some truth to them (ie. that there was not the $500Bn redemption, but that it was requested), although there is some doubt as to the qualification:

http://v2.ftalphaville.ft.com/blog/2009/02/16/52487/the-kanjorski-meme-and-the-end-of-the-world-redux/

Is collapse defined? Otherwise, it's entirely subjective and based on perception. The same series of events can be viewed by some (pessimists, I would call them) as a collapse, while simultaneously viewed by others (optimists) as just a problem to be fixed. Your "personal guess" seems to fall into the latter category.

Here's a guess of my own: That if the system had collapsed, and there was rapid nationalization of the banks, as Tyler suggests, we might actually be better off now. Which is not to say that the economy would be thriving. But there'd be much less mystery about how much bad debt is out there, we'd have the inevitable restructurings happening fast & furiously and we'd been on our way to healing the system, albeit with a lot additional pain. The current obsession with maintaining the appearance of normality in the face of gigantic structural imbalances is prolonging and deepening our problems. Here endeth my guess.
Oh and by the way, I think we'd all be shocked by the numbers of the businesses that operate with little or no reserves. Probably about the same as the percentage of American households that do, which is to say, most of them.

I think that the Aleph Blog has a good point about what occurred:

http://alephblog.com/2009/02/15/the-story-not-told/

I'll simply repeat me view that I posted there: There was definitely a threat to pull out of money market funds. The threat was to test the strength of the government's guarantees in this crisis. When the government essentially guaranteed money market funds, the threat ended.

They haven't explained exactly what happened because they DO NOT KNOW exactly what happened. They are still trying to figure it out.

When I first saw the headline, I thought this was a story about the Large Hadron Collider.

democratic capitalism? You mean maybe capitalism in democratic countries?

Of course the financial system was about to collapse - bailouts are big business.

Markets are very fragile. I'm really glad that we didn't have the opportunity to find out what would have happened.

Numerous posters have question whether the event did in fact occur, well the House Joint Economic Committee released the following four months ago: http://www.house.gov/jec/Research%20Reports/2008/rr110-25.pdf

Page 9 contains the following statement: "(o)n Thursday September 18, 2008, institutional money managers sought to redeem another $500 billion, but Secretary Paulson intervened directly with these managers to dissuade them from demanding redemptions. Nevertheless, investors still redeemed another $105 billion. If the federal government were not to act decisively to check this incipient panic, the results for the entire U.S. economy would be disastrous."

This does not tell the "who, what and where" of this situation but bloggers like the above mentioned Felix Salmon (who writes for a Conde Nast publication named Portfolio) is simply flat out wrong when he accredits the statement to the NY Post. Economic information from Conde Nast is not a good idea. Period. Especially if the writer can't even use Google.

Who appointed Felix Salmon the new "Decider"?

The facts in the Congressional research report back up what Kanjorski said on C-SPAN.

A synopsis of the report and a link to the complete official report can be found here:

http://www.capitalismgonewild.com/2009/02/update-rep-kanjorski-on-550-billion.html

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