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| Economy |
| US Govt Quietly Prohibiting Bank Runs |
| 2010-01-04 |
| Background: On Sept 18, 2008, at 11am 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 is 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. New regulations proposed by the administration, specifically by the Securities and Exchange Commission, seek to change the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration. Today, money market funds account for approximately 39% of all investment company assets; about 80% of all U.S. companies use money market funds in managing their cash balances; and about 20% of the cash balances of all U.S. households are held in money market funds. At this point it is without doubt that even the government understands that when things turn sour, and they will, the run on the bank will be unavoidable: their solution - prevent money from being dispensed, when that moment comes. |
| Posted by: Anonymoose |
| #12 I suspect the Federal Reserve also doesn't know, Anguper Hupomosing9418. I don't see how anyone can have more than a ballpark guess until the whatchamacallums are unwound that were based on bad mortgages -- and that can't happen until the bad mortgages go through to bankruptcy... right? |
| Posted by: trailing wife 2010-01-04 22:14 |
| #11 banks stopped lending to each other because the weren't sure of their bad debt holdings. We're still not sure of the bad debt holdings of US banks, although I imagine the Federal Reserve knows. |
| Posted by: Anguper Hupomosing9418 2010-01-04 21:50 |
| #10 The distinction about cash in hand vs cash in an electronic account is an important one.. Not really Anguper Hupomosing9418. The distinction should be between retail deposits and loans.The former are insured by FDIC and cannot default unless the Government defaults(Which cannot happen, at least in a fiat system) So you may not be able to access your credit card limit, but you can always access your deposits. The recent meltdown wasn't a retail failure, as happened during the depression when lines of people couldn't access their money, it was a wholesale crises when banks stopped lending to each other because the weren't sure of their bad debt holdings. On Monday, September 15, 2008, Lehman Brothers filed for bankruptcy. On Tuesday, September 16, 2008, Reserve Primary Fund, the oldest money fund, broke the buck when its shares fell to 97 cents, after writing off debt issued by Lehman Brothers |
| Posted by: tipper 2010-01-04 16:37 |
| #9 Unfortunately, most if not all pension payments both gov't and private are done electronically. Which can be withdrawn in cash the day those payments are made, theoretically. I imagine if everyone did this for just one month, it would use up much of the cash in circulation. The distinction about cash in hand vs. cash in an electronic account is an important one. |
| Posted by: Anguper Hupomosing9418 2010-01-04 13:57 |
| #8 Very, very interesting scenario Moose. Unfortunately, most if not all pension payments both gov't and private are done electronically. |
| Posted by: Besoeker 2010-01-04 08:48 |
| #7 At a personal level, several strange economic conditions are coming into play. In the Great Depression, first there would be loss of confidence in a bank, often in a domino effect with other banks, then there would be a bank run, and when the bank was effectively bankrupt, a bank holiday so money could not be withdrawn. This tries to change that order, to protect the bank(s) at the expense of their deposit holders. That is, when it looks like the bank is starting to have a run, it goes to a bank holiday first. This prevents further withdrawl by preventing people from accessing their own money. However, the people dependent on their savings are instantly impoverished, until the bank holiday is over. *Unless* they have mattress money. In the GD, some of these holidays went from 3-300 days, and many people never trusted banks again. But there is an additional twist. The assumption is that a bank run would be on the electronic funds of the bank. But if there is a panic, it could be in the form of a "paper run", not an electronic panic. Only 5% of US daily retail is in paper money and coins, because that is all the paper money we have. Because that is all the two US high security printing offices can produce at 100% capacity. The vast majority of it is $1 bills, only $60 billion of it is in $100 bills. And a LOT of those bills of all kinds go overseas. So the US government cannot produce more paper money, and cannot produce higher denomination bills, because nobody could make change for them in kind. So in effect, US paper money is 95% deflated. Everything else is electronic money. This means that if there is a loss of confidence, banks could be quickly stripped of their paper money long before their electronic money would be threatened. So this new rule might not even come into play. But then, instantly, paper money and coins are worth 20 times their face value. Everybody will want them, and retailers many very well reject electronic money in any form, be it credit cards, personal checks, or even bank checks. Legally, nobody has to take electronic money for debts; but they must take paper. And a big chunk of the economy *only* takes paper, not electronic payment. In effect, causing a paper and electronic money currency split. The banks may be wide open, but the electronic money within is worthless, because of the iron rule of currency. Everybody will want to spend the "bad" electronic money, so the banks go on holiday, which means the only currency left is cash. Without any other factor being involved, electronic money will inflate terribly, compared to paper money. Electronic money will be useless if retailers refuse it, and it cannot be exchanged for paper which does not exist. |
| Posted by: Anonymoose 2010-01-04 08:37 |
| #6 Guys, money markets aren't banks, not in any kind of legal sense, and they never have been considered banks. That's why (until recently) there was always the disclaimer that your money wasn't insured when you invested in them, and the returns were always a little bit more than an actual, FDIC-insured bank account would have paid. You think you were getting that little bit extra because you are special, or something? Naaaah. It was to compensate you for the (at the time) tiny bit of additional risk you were accepting in lieu of US government-backed insurance (FDIC, NCUA, etc.) If anything, the investors in these funds (yours truly included) lucked out that the guvmint stepped up to the plate to guarantee them. They were under no obligation to do so. Dig up an old, pre-Sep 2008 prospectus (yeah, that pamphlet that no one ever reads....) and look it up. I'm sure if you look closely enough, you will also find wording alluding to the fact that while a share would normally be valued at a $1 per, there was no guarantee that it always would be. The money fund managers always had the ability to suspend liquidations, they just never thought that they would ever have to do so, and neither did a lot of investors. I'm guessing this writer never took a Series 7/Series 63 exam. Hell, I did back in the 90's....and yes, it was part of the info I had to study way back then. This isn't anything new to anyone with a background in investments. There are reasons why investment professionals don't look at gold/precious metals enthusiasts with much admiration. It's not just because they are jealous of them and their dashing good looks....it's because a good chunk of them, like this writer, don't know what the hell they are talking about half the time. |
| Posted by: Cornsilk Blondie 2010-01-04 08:22 |
| #5 The more important issue is here: many of the country's largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department. Kenneth Rogoff, also of Harvard, argued that if the U.S. government ever "credibly" pulled away from its backing of the financial system, then a renewed collapse would likely ensue. He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines. "There's something of an illusion of profitability," he said. |
| Posted by: Anguper Hupomosing9418 2010-01-04 04:26 |
| #4 Just one question: Was George Soros positioned to profit from that blitzkrieg against our banking system? |
| Posted by: Jinens Lumplump6738 2010-01-04 04:08 |
| #3 I forgot to emphasize that money market funds ARE NOT BANKS. Regular deposits in 'real' banks are insured by the FDIC & have been (for the most part) since about 1934. 3 banks I had accounts with have been shut down by the FDIC since August 2007 when the current crisis started. I haven't lost anything there. I do believe that a little known part of the FDIC legislation is that FDIC-insured deposits lost in a failed bank will be made good by the FDIC, but just WHEN is not guaranteed. |
| Posted by: Anguper Hupomosing9418 2010-01-04 01:23 |
| #2 I thought money market account managers have always had the ability to suspend withdrawals to prevent a run. In any case money market funds are not and have never been 'absolutely' safe. To believe otherwise was just wishful thinking. I suspect what really stopped the money market run was the emergency federal $250,000 guarantee. |
| Posted by: Anguper Hupomosing9418 2010-01-04 01:19 |
| #1 This was news at the time and quickly buried. As I recall, concern was that it the sell orders were originating from IP addresses in (former) East Germany and the thought was the prime movers were Russian Mafia affiliated (or Russian government, who can tell anymore). Frank discussion of this with our Merrill Lynch rep during 401k briefings. Curious if anyone else had that impression or other scuttlebutt regarding what entity was the major player in the withdrawals . . . |
| Posted by: Spanky Wheack7175 2010-01-04 00:24 |