The Decade Past

It’s Déjà Voodoo Economics... All Over Again

It was the Lehman Brothers bankruptcy on Sept. 15th that set everything in motion. Most market participants will remember that date - Bank of America bought Merrill Lynch the very same day, so it was certainly memorable. What many people fail to appreciate, however, is 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.6 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 fact remains that on Thursday, September 18th, the US financial system almost completely collapsed. The details of that day remain frustratingly murky. The imminence of complete disorder seemed to scare 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 US. 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. We talked at that time about what would happen if that happened. It would have been the end of our economic system and our political system as we know it."7 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.8 It is interesting to note that while Henry Paulson mentions several meetings that took place on September 19th in his book, the discussion of ‘imminent financial collapse’ and ‘martial law’ was noticeably absent.

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."9 Between the official record and the statements by members of congress and the senate, we can piece together an almost system-wide collapse that was potentially hours away.

It’s Déjà Voodoo Economics... All Over Again

Read the whole thing. The problems of the last decade are being repeated again, only this time larger and with an underlying economy that is weaker.