Did the Economy Almost Melt Down on Sept. 18?

Tuesday night on Countdown they did a story that included a clip of a C-SPAN interview with someone, probably with the Fed, who said the economy appeared to be heading for a complete meltdown last September.

It’ll be a couple of days before MSNBC posts a transcript, but this contemporaneous AP story confirms the facts behind the claim.

Basically, what happened was that a large run started on money market funds (according to the above story, the funds were, for just the second time in their forty-year history, worth less than par, or whatever the correct term is). To stop the run, the Fed stepped in, shut down money market redemptions for a short time, and announced that henceforth they would guarantee money market accounts up to $250,000. That apparently stopped the “panic”. The guy on C-SPAN claimed that, had the Fed not stepped in, trillions of dollars might have been pulled out of the money market, leading to a national, if not global, economic collapse.

So, a few questions:

Did we, in fact, come close to a complete meltdown?

What does this say about the common assurances that New Deal agencies will prevent a Great Depression-like economic bust? Are there new types of panic that cannot be stopped, or does this incident show that the present regulatory structure can and will deal with anything that comes along?
If anyone needs me, I’ll be laundering the pants I was wearing when I heard about this last night. . . .

http://www.youtube.com/watch?v=INAGMSARPYw This is from another thread.
We are still in the mess. It has not been fixed.
There is a lot of talk about saving banks by buying bad loans. That still ignores the base problem. Foreclosures have to be dealt with. If we continue with 10,000 foreclosures a month, the banks will continue to fail ,over and over. The mortgages have to be redone so people can make payments and the banks get money from the bottom instead of grabbing billions in tax payer money. That is the fix that will work. But it is slower. There are millions of loans to be dealt with, one at a time. The TARP creates an illusion that the banks are solvent. Pouring cash infusions makes you think they are solvent, but the mortgages just keep on coming. They will continue to threaten banks over and over.
There is not enough money in the world to buy up swaps .

I apologize for continuing gonzomax’s hijack, OP, but I had to remind him that this isn’t true, and that he’s already been corrected on this issue. The trillions upon trillions of dollars he seems to believe will (need to) change hands if the entire swap market goes down tomorrow just doesn’t exist. The majority, IIRC, of that money, is already covered. Now, the amount that WOULD have to move is probably really large and worrisome, but it’s NOT more than all the money in the world.

(Sorry I can’t find my own cite from the mentioned last time; search isn’t working.)

As for the OP, well, the fact that the economy DIDN’T totally collapse then says something about your question about the agencies, doesn’t it? Even if it’s just about that one incident?

As for “new kinds of panic,” I think there’s an interesting question there. IS there any kind of economic panic out there that has not only never happened before, but would go totally unanticipated by the powers that be? Note that it would also have to go so quickly that there’d be no time to do the right thing (or think about doing the right thing), and as we’ve seen, financial forces can move pretty quick when they want to.

Of course Leaper. Swaps are about 62 trillion .Not a problem. Write them a check.

No, that’s exactly what I’m saying, and exactly what I said last time; I’m saying that that $60+ trillion number is WRONG for the purpose you’re trying to use it for:

If you want me, or anyone, to take the tens of trillions number seriously in your particular context, explain why the above quote is wrong and why we should count every penny as potential dynamite.

Heck, while you’re at it, analyze this opinion diametrically opposite to yours, at least as far as the swap market is concerned. It might be enlightening.

But not in this thread, obviously.

Sorry again, BJMoose.

I’d be curious after all is said and done, and hopefully the economy is back to some semblance of health, were the layoffs that seem to be spasming the economy, panic driven rather than need driven.



It seems that my knowledge of dystopian society might not yet go to waste.

I will be ready for this.

OK, I’ll try to get this thread back on to the original question submitted by the OP.

My answer is yes. What happened on that day was unprecedented. The Reserve Primary Fund 'broke the buck." Cite

So, why does that matter? Well, people put their money in a money market fund like that in order to have liquid cash. People will usually use such a fund to store non invested cash which exceeds the FDIC deposit insurance levels. The money market fund then invests in short term paper and returns the principal plus a rate of return to the investor.

Investor XYZ has $500,000 in cash and is waiting for an opportunity to invest it. So, he temporarily places it in a money market fund. That investor expects to be able to withdraw it at any time and receive the $500,000 plus whatever interest he’s earned. On Sept. 18, that investor woke up to find out that his 500,000 is only worth 485,000. Money market funds have always paid out dollar for dollar.

The investor will then immediately pull their money out of the money market fund. Now, what can he do with it? The ‘stuff it under the mattress’ mentality would have pulled billions of dollars out of the economy.

No problem, Leaper. Without the hijack this wouldn’t be much of a thread. I figured by now the economics wonks would be duking it out over whether a complete meltdown was possible. Or at the least, someone would be giving me a Dope slap for my Chicken Little routine.

While we didn’t go belly-up this time, the potential was there. What if the Fed had had to get approval from someone in the Bush administration before acting? What if the Fed were made up of folks who beliefs are similar to those of our libertarian friends here? What if they simply didn’t notice the problem in time?

How we recognize the next Godzilla before he trashes the town is a big problem. Anything that would be “totally unanticipated” would, by definition, be something we simply could not prepare for. I agree that such an ogre would be a quick critter. And with computers (mindlessly) involved in the economic system, a computer-program-driven instant selloff is entirely possible. (Indeed, the guy interviewed on C-SPAN remarked that the money market selloff was, at least to some extent, computer-driven.)

Which brings up a side question: how did this mid-September money market foofaw chronologically relate to the stock selloff? That money went somewhere, and money markets would be the mattress of first resort for many. Maybe the sudden infusion of cash is what screwed up the money market.
Lakai: Will you share your secrets when the time comes? Pretty-please?

How is it a highjack. The video specifically deals with the subject matter.

I can now “revise and extend my remarks”. The Tuesday Countdown transcript is here (about a quarter of the way down the page, after Olbermann chats with Howard Fineman). The talking head in the C-SPAN clip (from two weeks back) was, in fact, Congressman Paul Kanjorski (D-PA). He said, citing appearances in September before members of Congress by the secretary and chair of the Fed:

Enjoy. (?)

Fair enough. It was an example of another critter that may bite us yet.

Friday, October 10 in the UK:

Britain was ‘three hours from going bust’

Wish you blokes would stop imitating us. :wink:

Oy. We may yet see “bank holidays”.