Could a Modern Bank Run Trigger Another Economic Crisis?

[Esoteric]

Sept 2008: $550 Billion Disappeared in 1-2 hrs in an "Electronic Run on the Banks"

Well, that's what Paulson and Bernake told Rep. Kanjorski (D-PA) anyway



For those who don't know, the Great Depression's economic damage was mainly caused by bank runs(en masse customer withdrawal of deposits).

 

[Esoteric]

Direct quote from the video...

"On Thursday (Sept 18), at 11 in the morning 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 was 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...
We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment."
-Rep. Paul Kanjorski of Pennsylvania

 

[OmCheeto]

Very interesting. I was commenting about the velocity of money just this morning before I left for work. On my drive, I was wondering if the converse of money flowing too slowly(a problem), had been replaced by money flowing too quickly(Soros).

Houston. I think we have a new problem.

5 trillion dollars!

Who's money was that?
I hear the Japanese have had lots of extra cash laying around.
Or maybe all those $4/gal recipients put their money back where it came from.

Interesting times.

 

[jreelawg]

What was so special about that specific hour?

 

[Astronuc]

What was so special about that specific hour?

$550 Billion was withdrawn from money market accounts in the US!

 

[Werg22]

Honestly I find those claims very hard to believe. The World economy could have potentially collapsed in one day, in September 2008, when the severity of the recession was still not fully known?

 

[DrClapeyron]

So the money supply contracts for two seconds and the Federal Reserve finds it necessary to print money? When a bond is sold the money supply expands and when that bond is redeemed the money supply contracts but increases later on. The holder of a bond is garunteed with a certain amount of risk (default) the principal amount of the bond plus interest paid on the bond at the maturity date.

The US never defaults on its debt obligations, so we hear. However, here seems to be a case that claims otherwise, as stated by congressman Kanjorski.

 

[OmCheeto]

Quickly! Everyone read the following: http://en.wikipedia.org/wiki/Bank_run" , for an explanation of what is going wrong.

Before the Colbert people replace banks with elephants and money with pirates.

 

[DrClapeyron]

Ok, I have got to say that this claim lacks details. The congressman claims the $550 billion was withdrawn from US money market. Which money market is he referring, all markets, one in specific, the supposed aggregate total of US money markets, etc? It is not uncommon for such sums of money to leave the US money market, after all the economy is global, right?

 

[edward]

Honestly I find those claims very hard to believe. The World economy could have potentially collapsed in one day, in September 2008, when the severity of the recession was still not fully known?

Apparently someone did know.

 

[Phrak]

Well, that's what Paulson and Bernake told Rep. Kanjorski (D-PA) anyway



For those who don't know, the Great Depression's economic damage was mainly caused by bank runs(en masse customer withdrawal of deposits).

The root cause, seems to be the market, where taxi cab driver gave stock tips and people piddled away (as my dad would say) the wealth of a generation investing in glamor technology; blue sky stock. Something like the 90s, where we heard "We've broken the business model. The old rules no longer apply." Start-up companies were thick as flees. And the prices of stocks were not dependent upon dividends, but future expected value.

When this fantasy eventually broke, bringing down the whole market, this time around the Fed chose to loosen interest rates rath than let businesses fail. This action doesn't seem to have made any overall difference, but moved insolvent investments to the housing market.

The moral of the story seems to be, the pipper will be paid.

 

[Phrak]

A few years after the stock market crash of '29 a nice little jingle came out. Now, 9 years ofter the crash of march 2000, and the resultant failure of lending institutions where double digit unemployment should follow, it is a cyclically appropriate tune--

The lyrics:

So long sad times
Go long bad times
We are rid of you at last

Howdy gay times
Cloudy gray times
You are now a thing of the past

Happy days are here again
The skies above are clear again
So let's sing a song of cheer again
Happy days are here again

Altogether shout it now
There's no one
Who can doubt it now
So let's tell the world about it now
Happy days are here again

Your cares and troubles are gone
There'll be no more from now on
From now on ...

Happy days are here again
The skies above are clear again
So, Let's sing a song of cheer again

Happy times
Happy nights
Happy days
Are here again!

The uplifting irony of this gay little tune, graced with interstitiall undertones of forewarning, makes this summary hit a gotta-hear-it-again.
http://kids.niehs.nih.gov/lyrics/happydays.htm"