The Run on the Banks that Almost Was?
So says one congressman, via Donklephant:
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.
This is a really important story that deserves more coverage.
Comment by daveg — 2/11/2009 @ 11:48 am
One wonders whether the mainstream media were aware of it at the time and chose to keep the lid on. Frankly, this is one of the very few situations in which the media might deserve credit for NOT reporting a story.
In retrospect, it does explain some of the federal insanity that occurred late in the campaign season. Although it doesn’t excuse it.
Comment by Rojas — 2/11/2009 @ 12:32 pm
I would think that, if you take the story at face value, it would pretty well excuse it too.
I’m not sure how much I trust any of the specifics of this, but I do buy that the Fed believes they averted a massive run on the banks, and probably did to some extent. That said, if their guesses are even in the ballpark of being accurate, that would have to lead even the most diehard ideologue to rethink things a bit. At that point, you’re not talking about “maybe we need to have a bad Recession to teach us a lesson”, you’re saying “Maybe the world economy needs to collapse and civilization as we know it be fundamentally kicked in the nuts so a new, better system can arise, Phoenix-like, from the ashes, and just hope that that new system isn’t basically the same as the old one or doesn’t just suck in some all new way”. I can almost get there, but at that point you’re talking about a helluva lot of human misery for the sake of economic freedom. You’re running into Fight Club territory.
Comment by Brad — 2/11/2009 @ 8:02 pm
The claim is that the specific bank run could have collapsed western civilization. That claim is made without a warrant and should be treated as damned dubious. Even if I WERE to take it at face value, though, it would not follow that the congressional actions following–in response to a different crisis with a common origin–were likewise necessary to avert The Destruction Of Mudball Earth.
Comment by Rojas — 2/11/2009 @ 8:07 pm
5.5 trillion worth of American solvency being disintegrated overnight probably would indeed be an extinction level event as far as the global economy is concerned.
Comment by Brad — 2/11/2009 @ 8:26 pm
$5.5 trillion of mutual funds–said figure being an extrapolation from a single hour’s worth of data, posited by a single observer. You know, just like the guy who hits two home runs on opening day being on pace for 324 dingers. I’ve yet to hear any actual analysis of the methodology involved in the conclusion reached; everyone is merely treating it as gospel. And, while we’re at it, who IS this guy who can tell us authoritatively that we nearly witnessed the collapse of civilization?
And it’s irrelevant, anyway, where the subsequent congressional actions are concerned. I’m not complaining about the fed’s decision that day to shut down the market for twenty-four hours; I’m complaining about the nonstop preemptive panic mentality since.
Comment by Rojas — 2/11/2009 @ 8:31 pm
Hey, I said if you accept the figures at face value, and I even went and said I basically don’t. Like you, this is the only mention I’ve heard of it, and it’s a third hand account of a Democratic congressman quoting anonymous top-level Federal Reserve guys to boot. Plenty to be suspicious about.
That said: we worry about what it would look like if all United States debt to the Chinese and whatnot suddenly got called in. Well, a 5.5. trillion bank run would pretty much rate, and then some. That’s pretty much, once all the aftershocks play out that first week, the equivalent of defaulting on half of our GDP.
Panic mentality might not be out of bounds, again, if you take that not even at face value, but at ballpark value.
Comment by Brad — 2/11/2009 @ 9:16 pm
Which is why I say that I understand it without excusing it.
As a general rule, I tend to frown upon panic-based policy. I guess that’s just me being one of those Conservatives Of Temperment that are all the rage these days.
Comment by Rojas — 2/11/2009 @ 9:52 pm
I suppose my point is that at some point it becomes a fiduciary matter.
Say, if in handicapping whether or not to pledge a trillion dollar bailout, the risks look like 55% it will do nothing one way or the other, 35% it will help, 10% it will make much worse.
And the “do nothing” option is a 5.5 trillion dollar evaporation in the United States economy. “Will help” is “avert or greatly lessen”. And “much worse” is “we’re all back to spearfishing”.
Going balls out to hit anything but that 10% chance of the global economy, in a day, returning to 1918 levels makes a certain degree of sense.
Comment by Brad — 2/12/2009 @ 12:22 am
We are talking about a $5.5 trillion transfer out of money market accounts into other forms of holding. It’s not like the money just goes poof. Certainly it would be bad for the original holders, and good for the new ones, and I’d grant that it would be bad for the economy as any transfer of that magnitude would be, but no, we would not be back in 1918.
Moreover, AGAIN, the $5.5 trillion figure is associated with that particular one-day event. It doesn’t justfify the actions of the following two months because those $5.5 trillion were not at stake during those two months.
We certainly are expending a great deal of energy on a matter where we differ only in intensity of meaning.
Comment by Rojas — 2/12/2009 @ 10:20 am
Follow-up:
And indeed, it sounds more and more like said congressman was talking out of his ass.
Comment by Brad — 2/16/2009 @ 6:24 pm
Excellent catch. Would that everybody who propogated this hoax were as quick to pull it back.
Comment by Rojas — 2/17/2009 @ 1:23 am