How The World Almost Came To An End At 2PM On September 18

http://zerohedge.blogspot.com/2009/02/how-world-almost-came-to-end-at-2pm-on.html

by robg • 17 years ago

153 100 17 years ago

zerohedge.blogspot.com

gaika• 17 years ago

Great Britain was very close to complete banking collapse on October 10th too. http://www.dailymail.co.uk/news/article-1127278/Revealed-Day...

pj2• 17 years ago

We can swim that far!! Lay on your back. Kick with your feet. Swim... Breathe, it keeps your chest elevated and your nose out of the water. Boats are coming if we need them, we'll make it.

jdnier3• 17 years ago

Holy freaking cow! I've not heard anyone explain/disclose the details of what actually happened before. Cheers to Representative Kanjorski for disclosing the details. The government shouldn't keep secrets.

ryanwaggoner2• 17 years ago

Noble sentiment, but if people knew this was going on at the time, it would have likely exacerbated the situation.

swombat4• 17 years ago

Indeed... this is worse than shouting "Fire!" in a crowded theatre. In fact, it's like shouting "Deadly stampede!" - if that makes any sense...

ckinnan3• 17 years ago

This incident was widely reported at the time.

earl• 17 years ago

Sigh... this is why you can never trust a Republican. Putting people who don't want government to work in charge of making government work has lead pretty directly to the financial disaster in which we find ourselves. The Democrats are no angels, but it was a Republican president and a Republican congress and a Republican chair of the Fed and a republican head of the SEC and a Republican head of the CFTC and on and on that fiddled for the last 8 years.

pbrown3• 17 years ago

This post was down-modded so far I shouldn't even respond, but I'm going to anyway. While you seem to blame Republicans for every thing that ails you, keep in mind that the "loosened regulations" on mortgage lending which is what caused this problem in the first place were initiated by a Democrat, Barney Frank, at the urging of a Democrat, Bill Clinton. Now go put your head back in the sand.

swombat4• 17 years ago

Both of those posts are being downmodded because this is not the place to have a "democrats versus republicans" debate. Keep that stuff on reddit, thank you.

gruseom2• 17 years ago

s/World/Current Form of the Economy/

swombat4• 17 years ago

Close enough for the millions that would die in the resulting unrest.

nihilocrat2• 17 years ago

The current recession is edging on the side of depression, and I don't see any small-scale riots going on. How do you figure millions would die from "unrest"? Most people in the developed world are too complacent to really get angry and kill each other, and killing a million people is a surprisingly tough job to do without the assistance of nuclear weapons or national war machines.

Maybe I'm just misunderstanding the gravity of a collpase, but I don't remember reading about people spontaneously murdering each other and looting after Black Friday in 1929.

gruseom2• 17 years ago

This exemplifies the hysteria that my comment was trying to downplay.

tlrobinson• 17 years ago

The World [as we know it]

ryanwaggoner2• 17 years ago

Can someone explain this to a non-finance / non-macroeconomics type? Was it foreigners who were pulling money out? Was it people in the US? If they pull $5.5 trillion in cash out, where would it have gone? Just don't understand why everything would have collapsed.

josefresco• 17 years ago

If you read the comments, someone said that it was mid-level people, like money market managers who were pulling the initial money out. I can't speak for the entire 5.5 trillion.

dreish• 17 years ago

A better question is: Where would it have come from? Most of the assets backing money market funds are short-term obligations to repay from a broadly diversified range of borrowers, usually corporate or municipal, with a small amount of cash to facilitate transactions. The terms of those loans to companies and local governments don't allow the bank to just demand the money ahead of schedule. The assumption is that when one particular fund experiences a high volume of withdrawals, it will be able to sell its commercial-paper assets to other banks, or as a last resort, borrow from the Fed to cover the withdrawals. The extraordinary event here was that there was such a massive panic across the entire country, not even the Fed would have been able to keep up.

Incidentally, what touched off this panic was when two money market funds "broke the buck" on the same day; that is, instead of paying their investors an interest dividend, they announced that their investors' deposits had shrunk (by a small amount) from the day before. Depositors thought the financial crisis was about to consume money market accounts, panicked, and moved their cash from non-FDIC-insured MM accounts into regular checking accounts.

bokonist• 17 years ago

The funds would have simply vaporized. The actual supply of green dollar bills in the world is about $800 billion. But money market funds are valued at $8 trillion. If everyone actually tries to redeem their shares for dollars, each share would ends up being worth pennies on the dollar.

Instead, the Fed stepped in an backed up the funds with the full faith and credit of the U.S. government. Essentially, the Fed monetized the money market funds.

tc• 17 years ago

If true, this was part of a flight to government-guaranteed debt such as US Treasuries and away from debt such as corporate and municipal bonds. This has been called the flight to 'quality,' but of course the only quality inherent in government debt is that the government can always print more money rather than defaulting. Of course, once a substantial block of assets receives this guarantee, investors demand a premium for debt that _lacks_ this guarantee. Existing corporate bonds didn't have this premium, so everyone wanted rid of them once the government expanded guarantees to cover nearly everything but corporate debt. And since money market funds held substantial portfolios of corporate bonds, investors wanted their money out of money market funds.

See also this contemporaneous piece:

http://norris.blogs.nytimes.com/2008/09/17/flight-to-quality...

michaelneale2• 17 years ago

>government can always print more money rather than defaulting

That's not all powerful nations governments can do. The militaries of countries are not only there for defense, they have always been to guard the "interests" of countries as well as their people. Everyone seems to forget this (and it would seem immoral today to use military to further interests beyond life and liberty, yet history shows that has always been the case).

mattobrien2• 17 years ago

This was a bank run, except it involved money market accounts. Money market accounts hold a lot of short term corporate debt. After Lehman went bankrupt, a few prominent money market accounts that held Lehman debt "broke the buck", ie paid out less than what investors put in. Since money market accounts weren't insured at the time, this set off a panic. People likely called their fund managers, trying to redeem their funds, to move it to FDIC insured bank accounts. If fund managers tried to redeem over 50% of their funds at once (as some funds experienced), that would explain hundreds of billions of dollars draining out in an hour.

If the money market accounts crashed, financial companies wouldn't have been able to roll over their short term debt, which they rely on for day-to-day operations. Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy. Those bankruptcies would cascade, and depository institutions would fail as well, probably with bank runs on accounts over the FDIC limit.

What made the Great Depression great were the banking crises. Without a functioning financial system, a modern economy can't grow. And if we reached a point where people couldn't even get money out of ATMs, we're talking about complete social breakdown. One Congressman claimed the administration talked about martial law as a real possibility. We really did come close to the brink. And the downward cycle went even faster than prescient bears like Nouriel Roubini thought it would.

jacquesm3• 17 years ago

Thank you, that's the clearest explanation of this whole thing that I've read to date.

richcollins3• 17 years ago

> financial companies wouldn't have been able to roll over their short term debt, which they rely on for day-to-day operations

The fact that they rely on debt for day-to-day operations should be a red flag that they are doing something wrong.

anamax2• 17 years ago

> Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy.

Forced by whom?

Banks are required by govt law to have more assets than liabilities, but many institutions and individuals owe more than they have to no ill effect.

In the short-term, cash flow is the only thing that matters and even that is under some control. A bank can "simply" refuse to pay money that it doesn't have.

Yes, there will be consequences, but later, giving the bank time to do something useful.

However, current govt reserve requirements don't allow that.

Yes, I know the reason behind such requirements. My point is that they make certain bad situations worse and it's not clear that such amplification is required for the claimed benefits.

jwilliams• 17 years ago

Without a functioning financial system, a modern economy can't grow.

This is a good line - with all the (justifiable) negativity around at the moment it's easy to forget that we still need (good) finance to move forward.

icefox• 17 years ago

I wonder how long people will say "called their fund managers" when really most just use their dedicated app or log into a website and click a few things.

alecco• 17 years ago

> And if we reached a point where people couldn't even get money out of ATMs, > we're talking about complete social breakdown.

And in a country like USA it would mean a civil war. People have a tendency to freak out too much, like post 9/11. I don't see the Argentinean-style civil protests and spontaneous grassroots organizations. I'd bet on dog-eat-dog. (I write this with sadness.)

ckinnan3• 17 years ago

Only one broke the buck, the Reserve Fund. And they shouldn't have been anywhere near risky Lehman debt. That's what sparked the run-- people wanted out of the Reserve Fund and other investors were freaked that other money markets holding similar risky paper. The situation was fixed directly with a federal guarantee for money markets-- but the example was used as part of the fear-mongering to pass the TARP, which has absolutely nothing to do with money markets.

Also money markets/commercial paper debt markets are important to all businesses issuing short term debt, not just financials.

nostrademons• 17 years ago

Sometimes I wonder what would've happened had corporations actually found the commercial paper markets totally frozen (as opposed to mostly frozen) and themselves unable to finance daily operations. Would they really say "Okay everybody go home, we have no money" or would they say "Well fuck, nobody knows if hey're gonna get paid, but we got nothing better to do, so we might as well continue doing business."

The economy as a whole seems remarkably resilient considering that it's all built on confidence. In cases where trade completely collapses, firms often "evolve" an alternative currency - scrip, cigarettes, foreign currencies, paper ledgers. I wonder if established firms with longstanding business relationships would've just said "Well, nobody can get cash right now, but I'll make an entry in our Oracle database and we can sort out the mess later."

voberoi• 17 years ago

mattobrien's explanation was awesome. A lot about the current crisis was demystified for me in an episode of This American Life: http://www.thisamericanlife.org/Radio_Episode.aspx?episode=3...

I'd recommend this to anyone who's looking for a well-explained overview. Set aside an hour or so to give it a listen.

jackchristopher• 17 years ago

Thank goodness we have computers to track this stuff.

I wonder how long it took to see the sell-offs before the subsequent collapse in the 30s?

EDIT: I didn't mean to imply that we're near a depression. I was think about how technology helped us. Thanks makaimc.

makaimc• 17 years ago

I just read about this over the weekend in John Kenneth Galbraith's book The Great Crash. The ticker tape machines were about 3 hours behind in most parts of the country and that caused a massive sell-off as people tried to get out of the market even though they did not know the current value of their stocks.

rrival2• 17 years ago

Have you found anything similar that talks about Japan in the early 90s or argentina's collapses? I'm trying to find good parallel examples,

nazgulnarsil2• 17 years ago

this story is bullshit linkbait guys. can we please stop upvoting apocalyptic crap? when the economy rebounds the apocalypse bloggers will go back to milking other sources like mayan calendars.

rrival2• 17 years ago

http://ftalphaville.ft.com/blog/2009/02/10/52272/within-24-h...

nazgulnarsil2• 17 years ago

i saw the c-span video which is what everyone is referencing.

jah2• 17 years ago

Can anyone explain why this activity wasn't reflected in the stock market? The DOW had a +400 point gain on Sept 18th.

pj2• 17 years ago

The money was coming out of money market accounts. If the DOW went Up 400 pts, perhaps the money was going /from/ money markets and /to/ the market.

jah2• 17 years ago

If true it certainly highlights the paranoia of the day. Keep in mind, the DOW lost approximately 800 points in the three days preceding Sept 18th. Were investors in such fear of a banking collapse that they chose to divert funds from "secure" money markets to the insanely volatile stock market?

jaaron3• 17 years ago

The DOW is a horrible measurement of what's going on in the economy. Don't use it.

jmtame• 17 years ago

i'd be curious what pg has to say about all of this. does he take the gary vaynerchuck approach and say "put your head down and crush it, it's going to be fine tomorrow" or does he think it should become part of a startup founder's thought process?

i personally am interested in economics and banking (i enjoy reading the conspiracy theories too), but after a while i wonder why i worry about it. the more i worry about that, the less i get to focus on a startup.

palish2• 17 years ago

It would be foolish to worry about an apocalypse when you're not sure it's going to happen. Instead, worry about why your users have to click three times instead of two.

michaelneale2• 17 years ago

I guess there are always apocalypses (apocalypti ?) hanging around. Killer bees, asteroids, sudden catastrophic climate change, killer cosmic rays from a supernova, some freak of physics, accidental nuclear war (or deliberate), some big volcano and so on...

Of course the real danger for a personal apocalyse: getting in your car and driving. We live with it every day. No big deal.

raghus• 17 years ago

On Sep 26, President Bush said "We got a big problem" http://blog.mint.com/blog/wp-content/uploads/2008/11/visualg...

weegee• 17 years ago

Auntie Em! Auntie Em! Where are you Auntie Em!

Jakob• 17 years ago

I like this comment: ”Great. We have a system that cant be saved and cant fail.”

tptacek3• 17 years ago

Isn't this article just saying, "if the Fed had chosen not to fulfill one of its basic duties to act as a circuit breaker in the event of a banking panic, there would have been a calamitous banking panic?"

jwb1193• 17 years ago

i think its saying "we came closer than we ever have to the Fed not being able to fulfill one of its basic duties"

tptacek3• 17 years ago

I guess I'm asking, where is the evidence that the Fed was close to not being able to fulfill its duties? The story reads to me --- and what do I know? of course --- as "The Fed saw a problem, tried Plan A, and when that failed, used Plan B to solve it".

jwb1193• 17 years ago

call me a cynic, but has anyone actually verified that what this guy says is correct..

i worked on a trading floor at a major US bank and i have a degree in economics. its sometimes mind boggling to see the lack of knowledge of some of these senators.

to put it in a tech perspective, remember back to the "series of tubes.."

jd2• 17 years ago

Googled around - these are my findings.

1. The Fed publishes -several- press releases every day. They report on the most mundane issues (meeting times, etc) up to their financial decisions. So this event must have been mentioned in a press release.

2. The best match I found was this one: (http://www.federalreserve.gov/newsevents/press/monetary/2008...). If it is about the same event, they described the crisis as "elevated pressure in U.S. dollar short-term funding markets." Response: $180 billion dollar increase in swap lines by the Fed.

This press release was posted on Sept 18th this year, the date of the supposed catastrophe.

3. I couldn't find a single reputable news source or agency that even hinted at a possible catastrophe.

For your amusement, Google "federal reserve 550 billion" and watch the Ron Paul references fly by. Considering the lack of supporting evidence I think it's safe to say the world wasn't about to end on Sept 18th this year.

mynameishere• 17 years ago

Were you seriously looking for the word "catastrophe" in federal reserve press releases? Try to keep in mind that the DJIA can collapse if the fed chairman has the hiccups--so, they tend to wrap everything in "fedspeak"

http://www.youtube.com/watch?v=0liegrixknA

...what really happened was that the fed gave FDIC-style assurances to the money markets, which are not regulated in the manner of FDIC-insured commercial banks. That sounds boring as hell, I know.

jaaron3• 17 years ago

I'm not sure about the 550 billion number, but there was a run on the markets that week. On September 19th, the US Treasury put in a guarantee on money market funds [1]. The commercial paper market froze that week as well. That alone put the US economy near complete collapse. Figures such as 3 hours are somewhat arbitrary, but don't dismiss the seriousness of financial crisis that week in September.

[1] http://www.ustreas.gov/press/releases/hp1147.htm

Mistone• 17 years ago

ahh snap, so close, we'll get'em next time.

How The World Almost Came To An End At 2PM On September 18

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