Sept.18: Congressional Leaders told US Economy Had Been Hours Away from Collapse
A stunning video has surfaced of Rep. Paul Kanjorski (D-PA) describing Thursday September 18 when Bernanke and Paulson starkly informed Congressional leaders how close the economy had come to collapsing that day.
After $550 billion had been electronically drawn out of money market accounts and $105 billion had been poured back into the system with no effect, the Federal Reserve and the Treasury made the decision to shut down the money market accounts and announce a guarantee of $250,000 per account.
Rep. Kanjorski:If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion 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.
It would have been the end of our economic system and our political system as we know it. [via Magnifico at Daily Kos]
Again via Magnifico, The Motley Fool adds some background as well as a possible connection to martial law in The One Jaw Dropping Video that Every Fool Must See. Both Sen. Inhofe, R-Okla., and Rep. Brad Sherman, D-Calif claim that Paulson brought up the possibility of a declaration of martial law.
The same article also revealed that a November 2008 Army War College Report discusses the possible use of the US military in the event of a domestic economic collapse.
Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security. Deliberate employment of weapons of mass destruction or other catastrophic capabilities, unforeseen economic collapse... are all paths to disruptive domestic shock. [p.32]Support for Kanjorski's claims can be found in archives from that time period:
Congressional Leaders Stunned by Warnings, NY Times, Sept. 19, 2008.
...as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first. Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill...
Rushing to save money-market funds, CNN Money, Sept. 19, 2008
By Friday, federal officials worried that the strain on money-market funds had become too great and threatened the world's financial system.
As an aside, if all of this happened on Thursday, Sept. 18, why in the world did McCain wait until the last minute on the 24th to cancel his interview with David Letterman?
Thanks for the links to these videos.
After pursuing an answer to an idle curiousity last fall, I stumbled onto something so LaRochian that I would have reached for my tinfoil hat if I had not been reading a series of articles in a respected magazine for bankers and other institutional investors. Unfortunately the articles are now behind a subscription wall but here is a link to the lead article anyway:
The treasury market reaches breaking point
I don't doubt at all that both Paulson and Bernanke were in mortal fear that what was happening in the Money Market would become known and understood by the general public. It makes me so angry.
I started working on a post to explain what I've found but have become so tangled up I don't even know where to begin anymore. I could use some help sorting it all out if you would be so kind.
emmazahn at windstream.net
February 10, 2009 8:37 AM | Reply | Permalink
I feel like I just got back from a four month junket in China. I missed this entire story. You know this really gets to how fragile our system really is.
I recall a bunch of talk after 9/11/01 where 'it' was put out in the press that there was no constitutional requirement for elections to be held on the first Tuesday of November.
It really felt like Seven Days in May.
This is Bizzaro Superman. This is like a parallel universe.
February 10, 2009 8:48 AM | Reply | Permalink
A parallel universe with a nearly dead economy, dd! Has there been a sci fi book written with that kind of plot, yet? Or do we leave it to you for your next series? I vote for the latter. Serial installments every day.
February 10, 2009 8:05 PM | Reply | Permalink
Dah!
February 10, 2009 10:19 AM | Reply | Permalink
Succinct. And correct.
Also. :-)
February 10, 2009 8:06 PM | Reply | Permalink
Thank you for this seashell. It brings me back. Back to bush... ugh... and the fear that somehow they would drum up an excuse for martial law and the fear that somehow they'd cancel the elections and we really would have a dictatorship or a bushtatorship.
Reading this here this morning is like going through nightmare when that scenario might have occurred. And waking up to a new day, a President Obama, a man who can take 7 or 8 or 10 minutes to answer a question. In sentences with clauses and complexity of thought. A man who can think on his feet. And have me transfixed in front of the screen for an hour.
We nearly had a nightmare. And it's a new day in America. Thank God for that!
Wonderful blog!
February 10, 2009 11:16 AM | Reply | Permalink
It occurred to me last night that Obama was treating the press as if they were thoughtful individuals. Answering every part of their 5 part questions seriously and carefully. They're going to have to get used to having their questions answered.
And maybe, just maybe, they'll stop focusing on gotcha reporting and start being serious reporters again.
That's what I thought, watching that news conference.
But then, I woke up and read Peter Baker's "analysis" of the press conference in the Times and thought, once again, that reporters in the beltway appear to be living in a different reality from everyone else. But it's just the beginning, isn't it? They might actually change, as well.
February 10, 2009 12:03 PM | Reply | Permalink
Two big things the reporters are going to have to get used to:
First is Obama is probably going to be the presser king of modern history. I wouldn't be surprised to see a minimum of one per month on a general basis, with ones like last night's thrown in as needed. And, unlike Bush, his pressers will be covered by people like me, because actual information is being disseminated. If they all aren't actually televised (I imagine the major networks would be reluctant to do so) they'll certainly be carried by the cable networks and over the internet.
Second, the reporters are going to be made famous (or infamous), themselves, due to this increase in exposure. The audience will see who's asking the smart questions, and who's asking the "Have-you-stopped-beating-your-wife-yet" questions. My guess is that audience response to the *questioners* will be as swift and sure, in the form of email, as Obama's responses to them will be
It's a new day dawnin'. You betcha.
February 10, 2009 5:03 PM | Reply | Permalink
Did anyone else find the NY Post's reporter's question about A-Rod to be a little silly in light of all the more serious issues we're facing? War in Iraq, war in Afghanistan, American soldiers died yesterday, nukes in Pakistan, millions of people are losing homes and jobs, the banking system is still on the verge of collapse - who gives a f*** about some millionaire jock on steroids?
February 10, 2009 5:35 PM | Reply | Permalink
Second, the reporters are going to be made famous (or infamous), themselves, due to this increase in exposure. Good point.
February 10, 2009 8:07 PM | Reply | Permalink
Yeah, I am intrigued by that. You know old Chuckie is so different from monkey face (gregory) Chuckie does not see this as a play that is simply there for his advancement. He thinks, rightly or wrongly, that there somehow is a right and a wrong.
I always liked the lad. He would talk back to Scarborough. Same thing for Matthews when Chuckie thought he was being to harsh. And other reporters were attempting to look ready, willing and able to ask the right questions, the relevant questions. Questions that made them look like they could read and write and remember things.
There may well be a new competition out there. You have made me think about this. And the thinking does not put me in despair.
So it may be good, right?
February 11, 2009 12:44 AM | Reply | Permalink
Thanks, TheraP. You're optimism is contagious and I appreciate it, even if I don't fully share it. BO is the best President we could have and I hope that the crisis isn't so far gone that even he can't handle it.
Damn. Guess it's time for another indulgence, even though I have yet to sin since the last one!
February 10, 2009 8:02 PM | Reply | Permalink
Done! :)
February 10, 2009 10:07 PM | Reply | Permalink
Seashell, thank you for the post. I remember hearing something (this will be garbled I know) about a national guard unit being either called back or kept in the US (when they were supposed to be going to Iraq) for some vauge purpose - in case it was needed. I thought at the time there were concerns about what would happen if Obama lost the election or won the election - you know, the rioting in the streets rumors. Ffing Bush, don't tell me those jackasses didn't know something was up. I swear they did but they didn't know it was going to be as big as it was and they were hoping it would wait until Bush left. And I hope I live long enough to see that truth out.
February 10, 2009 11:34 AM | Reply | Permalink
You, me and Elizabeth make three on this blog alone with memories of something not right happening in the Army. When I have more time, I'll investigate.
February 10, 2009 8:08 PM | Reply | Permalink
Someone will be getting to the bottom of that selloff. Looks to many like a moneyed conspiracy to create the economic crisis which helped the dems so much in the election.
The dots will be connected
February 10, 2009 4:18 PM | Reply | Permalink
Just my opinion but I think it wound up helping the Dems so much because McCain bungled it -- badly!!! -- and Obama dealt with it like a pro. This would not be what most people would have predicted.
Instead, it would be an economic version of Osama bin Laden popping up just before elections and making folks run to the bellicose Republicans. A big financial melt-down would logically make folks run to the people who know how to deal with money, the Republicans.
I also recall word of one or more National Guard units begin readied for in-country action but, as with a poster above, could only assume they were paranoid and expecting trouble if Obama lost the election or something.
I do hope the dots are connected. If nothing else, this explains the white faces coming out of that evening meeting.
February 10, 2009 7:41 PM | Reply | Permalink
I didn't pay much attention to the militia talk for the same reason, E2. We probably need more dots, but the outline is at least coming together.
As to the rest of your post, well said.
February 10, 2009 8:10 PM | Reply | Permalink
No doubt McCain is an idiot who has been carried through life on 'war hero'. Obama nor his handlers needed any skill with all the support he got from media.
But what you allude to about the national guard is scary. Was that during the September financial crisis, or at the time of the election? Many hood leaders promised a chimpout if Obama lost.
But I'm thinking governors call the guard up. Wonder which states that were?
February 10, 2009 11:14 PM | Reply | Permalink
It can never be a system that encourages unsupported risk, it is always just a few bad apples, eh?
That combined with a trumped-up crisis to steal an election?
Face the facts, sir. GOP policies invite catastrophe (see Iceland, leveraging, krona).
February 10, 2009 10:26 PM | Reply | Permalink
You know, that leveraging you mentioned is something I learned only lately was so flimsy.
When you can control so much make believe wealth with actual control of such small assets, it's kinda like the banks were playing the futures markets with our deposits isn't it?
I'm wondering how we ever got to such a point to begin with. The crooks must have had control of the system for a much longer time than I led myself to believe.
February 11, 2009 1:39 AM | Reply | Permalink
Seashell, I read about this today also, and I have to say some things about it don't make too much sense. First of all, financial armageddon looms and it all gets fixed by modestly increasingly deposit insurance? Seems to me if everyone was that scared about a massive loss of confidence and a resulting run, then they would have insured all deposits, just to be safe. Also, I have to say that I feel Paulson used a crisis atmosphere that he created to give huge sums of government money to all his friends in a big hurry with no strings attached. I'm not saying it was a big con job, he really did at one point seem to be having a panic attack during one of the meetings, but I don't think anyone really knows what went on yet. I do think that we need to know.
February 10, 2009 7:50 PM | Reply | Permalink
Yes, there is something missing here.
"Kanjorski: If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States"
How they got from $550B in one hour to $5.5T in 3-4 hours, I cannot imagine. Also, generally speaking "money market accounts" don't offer instant withdrawals. Where would all the alleged cash go to, other accounts?
It is possible that there was some kind of coordinated attack on the money system, but so far there's been no evidence of any such conspiracy, a kind of "electronic economic 9/11" attack. What there is evidence of is blatant exaggeration and fear-mongering by government officials who were either corrupt or incompetent. Or both.
This by itself might as important a subject for Congressional hearings as what Leahy has proposed for the Bush era in general. What exactly did happen in finance between July 15 and Sept 24, with special focus on Sept. 18?
WaMu was going down the drain. I heard something like $15B taken out around Sept. 18 as a run on the bank. What other accounts at what institutions? Were the accounts being looted to cover losses on long positions in margin accounts as stock prices fell, to acquire cash to establish short positions as further speculation, or what?
$5.5T = 55 million accounts ballpark @ $100K, or about 22 million @ $250K, the new guaranteed level mention. How many accounts with how much money were being drawn down? Where did the $550B come from and go to? Is K. feeding us a line, or what?
Simple facts available to the Fed et al, which should be simple to present to the public.
February 10, 2009 11:07 PM | Reply | Permalink
Tom and Eds, I'm just the reporter here, reporting what I discovered and a few things I tried to verify about the discovery before posting it here.
Having said that, I believe that most money markets do offer instant withdrawals now. Mine does and it doesn't have a limit on how often, either.
While I'm clear on K's reference to an electronic run on money market demand accounts (MMDA) on Sept. 18th and the Feds subsequent 'up to $250,000' guarantee as of Fri the 19th, I'm can't tell which money market K is referring to in his $5.5 trillion would have been drawn out of the money market system of the United States claim. The MMDAs or the global short term borrowing and lending money market that deals in 'paper'. But I suspect that the answer to the $5.5 trillion mystery may lie in the answer.
February 11, 2009 12:17 AM | Reply | Permalink
If you find out more, I'd like to see your next "report"!
I had not heard the $5.5T threat before.
February 11, 2009 12:21 AM | Reply | Permalink
If I hear more, I promise to deliver, eds. In fact, I would love to hear more!
February 11, 2009 12:30 AM | Reply | Permalink
I believe that 5.5 trillion wouldn't just be individuals yanking their nesteggs out of money market mutual funds but institutions sitting on the sidelines waiting to see what the stock market was gonna do. They gotta park that cash somewhere and that's where it usually goes when it's not fully invested. They were basically saying faith in the American banking system was about to go up in flames starting with large institutions and inside players on Wall St followed by the rest of us who wouldn't sit idly by if our return on our deposited dollars suddenly was less than at least that dollar we put in. That's what "breaking the buck" refers to.
February 12, 2009 1:00 AM | Reply | Permalink
Wow seashell.
Also.
This stuff just knocks me off my feet. I have a sinking suspicion that the banks are a lot worse off than we think they are.
February 10, 2009 9:00 PM | Reply | Permalink
Which is why the stocks are bleeding when Geithner mentioned the stress test. JPMorgan Chase dropped 10%... It is not the vagueness insomuch as the inevitable transparency... It is causing a sell-off.
February 10, 2009 9:36 PM | Reply | Permalink
The stress test is all important as you so correctly note.
February 11, 2009 2:07 AM | Reply | Permalink
That's what they said on the Newshour tonight bwak. That many big banks are insolvent. Krugman and a guy from Harvard were talking several trillion.
February 10, 2009 10:05 PM | Reply | Permalink
Nouriel Roubini, the guy who predicted this fiasco a year ago, wrote today that the banks are insolvent and it's time to nationalize the banking system. And he is also talking trillions, with at least 1.4 of them needed to get back just to where we were before the crisis.
February 11, 2009 12:42 AM | Reply | Permalink
Yes, bwak. As usual the chicken is ahead of the game.
Also.
February 11, 2009 12:32 AM | Reply | Permalink
Let us remember Iceland.
February 10, 2009 10:23 PM | Reply | Permalink
Thank you for persisting in your call to remember Iceland, Tom. Sorry it took so long to 'get it'.
Anybody interested in what happens when a nation's banking system collapses one year after it has been named the worlds most desirable nation, should start with Iceland is Burning.
Day 2 highlights the following:
Five will get you ten that a year ago an Icelander would have told anybody that 'it couldn't happen here'.
February 11, 2009 1:53 AM | Reply | Permalink
Well I guess Paulson saved us from the end of the world.
I hope Geithner can do the same. But what we heard today doesn't make us too comfortable that there's any silver bullet.
The next few years are going to be very rough, even if we spend trillions trying to stimulate ourselves.
February 10, 2009 10:47 PM | Reply | Permalink
If there is not silver bullet, there could at least be meaningful truths.
If the banks are insolvent, or about to become insolvent to the tune of trillions, what is that all about? How much owed to whom for what versus what assets etc?
I still see two loopholes: Mark to market truly does vastly underestimate recoverable assets, and, the "complexity" of derivatives and the like are masking or making for losses. The former works in the banks' favor, the latter could go either way. Effects of short selling need to be taken into account, and shorts canceled out in certain places. Gamblers and crooks need not apply for assistance.
February 11, 2009 12:31 AM | Reply | Permalink
I think I know what you've been talking about. There was a bit in the Army Times about the 3rd Infanty Division's 1st Brigade Combat Team being assigned to day to day control under U.S. Army North, beginning October 1, 2008, for 12 months as an "on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks."
Most interesting in that article was:
"...Training for homeland scenarios has already begun at Fort Stewart and includes specialty tasks such as knowing how to use the “jaws of life” to extract a person from a mangled vehicle; extra medical training for a CBRNE incident; and working with U.S. Forestry Service experts on how to go in with chainsaws and cut and clear trees to clear a road or area.
"The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them."
Of course, Army Times hastens to add that the above would NEVER be used domestically. :::eyeroll::: because we would TOTALLY train a unit about to spend 12 months on stateside defense in how to handle crowd control in a war zone.
February 10, 2009 11:54 PM | Reply | Permalink
Bingo, Karen. Please go here for your free indulgence!
You are a star for remembering and finding that information. And, welcome to TPM Cafe, where memories are short sometimes, posts are long and short sometimes, but it's seldom ever boring. Thanks again.
February 11, 2009 12:28 AM | Reply | Permalink
Ira Glass did two shows on "This American Life" last year about the financial crisis, one in May and another in early October after the credit system locked up.
http://www.thislife.org/extras/radio/355_transcript.pdf
http://www.thisamericanlife.org/extras/radio/365_transcript.pdf
These are interviews with mortgage brokers, homebuyers, Wall St. stockbrokers, money managers, lenders, and the treasurer for the company that owns Terminix and Merry Maids. All links in the chain from top to bottom of the financial system.
If you want to understand why Lehman Bros. failing wasn't nearly the calamity that "breaking the buck" at a money market called the Reserve Fund was go to page 5 of second pdf. But both are are excellent primers on understanding how this stupidity wrecked the world's financial system.
If you don't want to read the transcripts you can get audio at the suite too.
February 11, 2009 9:56 AM | Reply | Permalink
Thanks, Mark! Just finished the second transcript and came back here for the first. This is good stuff.
February 11, 2009 4:30 PM | Reply | Permalink