Tuesday, March 16, 2010

Bueller?... Bueller?... Bueller?...

Today's post is a continuation of a theme started yesterday. If you missed it, start reading here.

The Financial Collapse of 2008

It was the Lehman Brothers bankruptcy on Sept. 15th, 2008 that set the financial collapse of 2008 into motion.

I’m not going to dwell on the whole subprime mortgage situation, instead the focus is on what many people fail to appreciate… the mayhem that took place during the following days in the US money markets.

The day after Lehman’s collapse, the Reserve Fund, one of the oldest and most high profile US money market funds, began to hemorrhage money as investors redeemed in panic.

Large institutional investors soon began pulling money out of other major US money market funds fearing heavy losses from Lehman Brothers debt.

Almost $173 billion was pulled from such funds over the next two days, threatening to collapse the entire US financial system.

Two weeks later, on Sept. 29th, investors sent the Dow Jones plummeting 778 points, representing the largest single-day loss in the history of the index.

In hindsight, it was somewhat of a delayed response, because the real damage had by then been averted by the Treasury’s blanket guarantees on all money market funds.

The main issue is that on Thursday, September 18th, the main people in power in the United States were convinced that the US financial system almost completely collapsed.

The details of that day remain frustratingly murky. The imminence of complete disorder appears to have scared Congress into action, but we can only piece the story together through random anecdotes that have been partially revealed through subsequent interviews.

In what has been dubbed ‘the Kanjorski meme’, Congressman Paul Kanjorski recounts a meeting that was held between Ben Bernanke, Henry Paulson and certain members of Congress where the conception of the "Troubled Asset Relief Program" (TARP) supposedly took place.

To stem the flow of money out of US-based money market funds, Paulson had to provide an almost instant guarantee on all money market funds held within the United States.

Kanjorski recounts, "If they had not done that, their estimation was that by 2pm that afternoon (September 18th), $5.5 trillion would have been drawn out of the money market system of the United States, [which] would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

Further details of these meetings have been provided by Senator James Inhofe, who recounted that Paulson had warned of martial law and civil unrest if the TARP bill failed.

Curiously, in his biographical recount, Paulson makes no mention of those warnings of martial law and civil unrest. But it was the threat of this dire consequence that reportedly played a huge part in Congress’ rash passing of the TARP approval.

The official record of the events of September 18th, 2008 comes from a research report issued by the Joint Economic Committee. The reports states, "On 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."

Between the official record and the statements by members of Congress and the Senate, we can piece together that lawmakers were threatened that an almost system-wide collapse of the world financial system was potentially hours away if they failed to act immediately by implementing the recommendations thrust in front of them.

The second fateful date of note was October 7, 2008, when the UK almost collapsed.

Bank of England Governor, Mervyn King, describes the situation: "Two of our major banks which had had difficulty in obtaining funding could raise money only for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day."

This was the justification given for the Bank of England to provide secret loans of £61.6 billion to The Royal Bank of Scotland and HBOS to maintain solvency.

Amazingly, news of these loans was never revealed until November 24, 2009; more than one year later.

Recalling that fateful day, David Soanes, Managing Director of UBS Bank, and part of the group assembled to assist with the UK government’s crisis response, stated, "We only really knew by probably about seven o’clock at night (October 7, 2008), that we, that everyone was going to get through to the next day."

These revelations raise new questions about the true scope of bailouts undertaken by the major governments at the time.

Lord Myners, the UK Financial Services Secretary, alluded to similar covert banking operations conducted by the European Central Bank and the US Federal Reserve. We have no idea what he is referring to, but we would certainly be interested to learn more.

This type of activity by the leaders of our financial system certainly helps to explain why those two dates are not more ingrained in our collective memory – strong efforts were obviously made to hide their severity.

What happened in September and October 2008 had previously been considered completely impossible and totally unthinkable.

But... it happened.

Moving forward, the first thing you have to come to grips with is that you must never forget that the ‘unthinkable’ can happen again. Until now we have always been told that the lessons of 1929 and the Great Depression had resulted in changes to the financial system so that NEVER AGAIN could the financial system come close to totally collapsing.

Yet... a complete banking collapse almost did happened. And as unpleasant and incomprehensive as it is, it must be remembered that we almost went there.

So where does this leave us for the decade ahead?

Regardless of whether you agree with the rational of 'imminent demise' used to coerce lawmakers into action in September & October 2008; the reality is that the emergency measures undertaken have left us in tremendously bad fiscal shape.

Our governments responded by liquefying the system beyond any rational explanation. The monetary base has been more than doubled since the collapse of Lehman Brothers.

The debt obligations of the financial system have been passed onto the governments of the Western World, including the government of Canada.

Tomorrow we will examine what that means.

To read the next part, click here.


Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. The 1930's depression was caused because of too much debt in the economy. Our present financial crisis was also caused by too much debt in the economy. You cannot solve a problem which was caused by too much debt by going further into debt. All this "stimulating the economy" stuff does is push off the "day of reckoning" for "all of the borrowing and spending we have done" into the future. Piling on more debt is just going to make the inevitable economic crash that is coming worse when it does come. It's time to face the music folks. We have not been smart with money.

    Congressman Clifford Stearns said the following in the United States House of Representatives on April 28, 2009:

    Many economists look to the past to predict economic futures; it is a tested way to learn from past mistakes and avoid making them in the future. Looking to the past, we discover that Henry Morganthau, FDR's Treasury Secretary, gave this very important quote in May of 1939 during the Great Depression. He said, ``We have tried spending money. We are spending more than we have ever spent before and it does not work. I have just one interest, and now if I am wrong, somebody else can have my job.
    I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say, after 8 years of this administration, we have just as much unemployment as when we started, and enormous debt to boot.''


  2. You say "we almost went there" Let me tell you something....... WE ARE THERE.......JUST REMEMBER THIS....."DEPRESSIONS TAKE TIME".


  3. The Great Correction: Awaiting Bailouts that Will Never Come

    We’re going to rename our theory. This is more than a depression; it’s more than a financial and economic phenomenon. It includes a shift of power…a return to normal after 4 centuries of aberration…and the failure of a whole line of Nobel Prizing-winning economic claptrap, including the Efficient Market Hypothesis and Modern Portfolio Theory. Let’s call this phase “The Great Correction”…and wait for events to prove we’re right.
    In the meantime…we await clarification…

    When will this bounce end? What will happen when it does?

    Yesterday was another inconclusive, information-free day. The Dow rose 17 points. Gold went up $5. Oil fell to $79 a barrel.

    But the deep trends continue. The government grows…and heads towards bankruptcy. Most developed nations are running huge deficits in their public accounts. The one that has been most in the news is Greece. The Hellenes promised to cut their spending, rioted in the streets, and now hope for some back-up plan from Europe. The rest of the PIGS (peripheral European states, with good food and wine, but bad finances) watch carefully. What Greece gets now they’re likely to get later.

    But the problem is hardly limited to the small states of Europe.

    Barron’s reports that the states face “massive shortfalls” in their pension programs. This is in addition to the other massive shortfalls faced by governments all over the planet.

    “US ratings threat,” is the headline on today’s Financial Times:

    “Moody’s Investor Service will warn the US today that unless it gets its public finances into better shape than the Obama administration projects there would be ‘downward pressure’ on its triple A credit rating.”

    Moody’s learned a lesson last year. You take money from the ratee. You give a good rating to junk. Then, people point their fingers at you and sue when the junk goes bad. The raters don’t want every Treasury bond holder in the world at their throats.

    The US is going broke; no doubt about it. Of course, it may take years…

    What the hell? We can wait…

    Some Treasury buyers aren’t waiting until the last minute. “China continues selling US Debt in January,” comes a report from The Wall Street Journal.

    Japan too, adds Bloomberg.

    Japan, of course, faces a financial crisis of its own. It already has government debt greater than 200% of GDP…and its aging citizens are saving less money each year. Pretty soon, it will be unable to finance its deficits. Then what?

    Then, yields will rise and Japan will face a crisis similar to that of Greece.

    And what about China? Even countries with sound budgets can take huge financial hits.

    “China may face massive bank bailouts,” Bloomberg reports.

    Yes, dear reader…China has a solid budget…and industries that make money. The trouble is, it has too many of them. And now it’s made the mistake of stimulating them to increase production – as well as increasing infrastructure – at the worst possible moment, just as their major customer goes into a funk.

    So, while China’s state finances are in good shape – at least on the surface – its private sector finances are a mess. They are such a huge potential mess that one analyst refers to China as the ‘mother of black swans.’

    Who’s going to bail out China’s banking sector? Who’s going to bail out Greece? Who’s going to bail out Japan? Who’s going to bail out the US?

    Day by day, the lumbering, clumbering wheels roll on…towards bigger governments with greater debts… One government looks to another one to help it out. The other looks to yet another. One nation depends on its central bank…and its central bank depends on the US Federal Reserve, the capo di tutti capi of all the world’s central banks.

    Bill Bonner