More on the $700 billion bailout

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Rep. Paul Kanjorski, Chairman of the House’s Capitol Markets Subcommittee recently admitted on C-SPAN that it was an “electronic run on the bank” that prompted the $700 billion bank bailout.

Link to video: http://www.youtube.com/watch?v=_NMu1mFao3w

Here’s what he said:

“Look, I was there when the Secretary of the Treasury and Chairman of the Federal Reserve came and talked with members of Congress about what was going on, it was about September the 15th…Here’s the facts and we don’t even talk about these things…”

“On Thursday at about 11 am the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to the tune of 550 billion dollars, being drawn out in the matter of about an hour or 2. The Treasury opened up its window to help, pumped 105 billion dollars in the system and quickly realized 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 this, their estimation was that by 2 o’clock that afternoon, 5.5 trillion dollars 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…”

I suppose obvious questions would be: who was responsible for drawing out all this money, and why?

There were hints that something like this had happened, mainly published in The Wall Street Journal which is targeted towards financial workers (ie not Joe Moron) and that the Fed had panicked and started shoveling money at it. Apparently what had happened was that a money market fund "broke the buck", meaning its shares fell below $1. That meant that for every $1 placed in the fund, the fund holders got $.97 back. Staying above $1 is essential to the system. It had never happened before.

That's the why, but what about the who? I seriously doubt it was Joe Sixpack rushing down to Schwab and pulling out his money. Money market funds are used as short term cash positions by money managers, a place to park cash until they get ready to use it. They're not SUPPOSED to lose money, you see. What I think happened is that the "electronic herd", the common term in the US for our money manager class, all panicked at once and decided to get their money back. Like any herd, they're susceptible to stampedes. One of them panics, then they all panic. They rush to and fro blindly following each other, the blind leading the blind.

On the individual level, they're usually the products of upper middle class and lower class wealthy families, who have very expensive educations (no public universities here!), who usually have MBA's, and who individually consider themselves quite smart. The thing is, they're not. They got where they are through inherited wealth and family and university alumni connections, not brains or talent. So you have this aggregate that's responsible for trillions and trillions of $, and they are under tremendous pressure to show spectacular results, but they don't have Warren Buffett level financial genius. So they act like a herd-one of them gets an idea, and everybody follows.

Well, somebody got the idea to liquidate his/her money market positions, so the herd saw that and decided that they'd all better do the same. A run on the bank, IOW. Only these losers control so much money that when THEY do a bank run, they could wipe out global capitalism. That's what almost happened. While in the end it would probably mean a better world, in the short run it would mean plenty of failed states, including maybe the US, and the resulting problems such as massive food riots and warlords running amok. THAT is why Obama keeps talking about a new Great Depression. Everybody's spooked, and they worry that the run could start up again, and simply bowl the world over.