How The World Almost Came To An End At 2PM On September 18 | Hacker News Reader

How The World Almost Came To An End At 2PM On September 18

zerohedge.blogspot.com

153 pointsrobg100 comments

Can someone explain this to a non-finance / non-macroeconomics type? Was it foreigners who were pulling money out? Was it people in the US? If they pull $5.5 trillion in cash out, where would it have gone? Just don't understand why everything would have collapsed.

If you read the comments, someone said that it was mid-level people, like money market managers who were pulling the initial money out. I can't speak for the entire 5.5 trillion.

A better question is: Where would it have come from? Most of the assets backing money market funds are short-term obligations to repay from a broadly diversified range of borrowers, usually corporate or municipal, with a small amount of cash to facilitate transactions. The terms of those loans to companies and local governments don't allow the bank to just demand the money ahead of schedule. The assumption is that when one particular fund experiences a high volume of withdrawals, it will be able to sell its commercial-paper assets to other banks, or as a last resort, borrow from the Fed to cover the withdrawals. The extraordinary event here was that there was such a massive panic across the entire country, not even the Fed would have been able to keep up.

Incidentally, what touched off this panic was when two money market funds "broke the buck" on the same day; that is, instead of paying their investors an interest dividend, they announced that their investors' deposits had shrunk (by a small amount) from the day before. Depositors thought the financial crisis was about to consume money market accounts, panicked, and moved their cash from non-FDIC-insured MM accounts into regular checking accounts.

The funds would have simply vaporized. The actual supply of green dollar bills in the world is about $800 billion. But money market funds are valued at $8 trillion. If everyone actually tries to redeem their shares for dollars, each share would ends up being worth pennies on the dollar.

Instead, the Fed stepped in an backed up the funds with the full faith and credit of the U.S. government. Essentially, the Fed monetized the money market funds.

If true, this was part of a flight to government-guaranteed debt such as US Treasuries and away from debt such as corporate and municipal bonds. This has been called the flight to 'quality,' but of course the only quality inherent in government debt is that the government can always print more money rather than defaulting. Of course, once a substantial block of assets receives this guarantee, investors demand a premium for debt that _lacks_ this guarantee. Existing corporate bonds didn't have this premium, so everyone wanted rid of them once the government expanded guarantees to cover nearly everything but corporate debt. And since money market funds held substantial portfolios of corporate bonds, investors wanted their money out of money market funds.

See also this contemporaneous piece:

http://norris.blogs.nytimes.com/2008/09/17/flight-to-quality...

>government can always print more money rather than defaulting

That's not all powerful nations governments can do. The militaries of countries are not only there for defense, they have always been to guard the "interests" of countries as well as their people. Everyone seems to forget this (and it would seem immoral today to use military to further interests beyond life and liberty, yet history shows that has always been the case).

This was a bank run, except it involved money market accounts. Money market accounts hold a lot of short term corporate debt. After Lehman went bankrupt, a few prominent money market accounts that held Lehman debt "broke the buck", ie paid out less than what investors put in. Since money market accounts weren't insured at the time, this set off a panic. People likely called their fund managers, trying to redeem their funds, to move it to FDIC insured bank accounts. If fund managers tried to redeem over 50% of their funds at once (as some funds experienced), that would explain hundreds of billions of dollars draining out in an hour.

If the money market accounts crashed, financial companies wouldn't have been able to roll over their short term debt, which they rely on for day-to-day operations. Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy. Those bankruptcies would cascade, and depository institutions would fail as well, probably with bank runs on accounts over the FDIC limit.

What made the Great Depression great were the banking crises. Without a functioning financial system, a modern economy can't grow. And if we reached a point where people couldn't even get money out of ATMs, we're talking about complete social breakdown. One Congressman claimed the administration talked about martial law as a real possibility. We really did come close to the brink. And the downward cycle went even faster than prescient bears like Nouriel Roubini thought it would.

Thank you, that's the clearest explanation of this whole thing that I've read to date.

> financial companies wouldn't have been able to roll over their short term debt, which they rely on for day-to-day operations

The fact that they rely on debt for day-to-day operations should be a red flag that they are doing something wrong.

I think it's mostly as a way to smooth out their financial numbers, even companies with tons of money in the bank still uses short term debt on daily basis... at least that was how a business owner explained it to me.

> smooth out their financial numbers

So how will they fail if they don't have access to it?

Excess inefficiencies if they have to adjust immediately. They would have to unroll all the debt in a few days instead of the months it would take to unroll the debt in an orderly fashion.

It is interesting, for cultural and for business reasons, most tech companies do not use debt markets. (Tech companies-- especially software companies-- generate lots of cash flow and aren't as capital intensive as other industries).

There are also federal tax breaks that encourage the use of debt financing.

Your country's tax system is not alone in that regard.

That's not the way the commercial paper market works. Many companies use this for payroll and managing cash. It makes sense to use someone else's money when the interest rate is low enough that you can put your own cash into better use.

I wouldn't be too critical about this practice unless you have experience as a treasurer or CFO.

I'm not saying it doesn't make sense given the environment that they work in.

I'm saying that the environment that they work in doesn't make sense.

> Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy.

Forced by whom?

Banks are required by govt law to have more assets than liabilities, but many institutions and individuals owe more than they have to no ill effect.

In the short-term, cash flow is the only thing that matters and even that is under some control. A bank can "simply" refuse to pay money that it doesn't have.

Yes, there will be consequences, but later, giving the bank time to do something useful.

However, current govt reserve requirements don't allow that.

Yes, I know the reason behind such requirements. My point is that they make certain bad situations worse and it's not clear that such amplification is required for the claimed benefits.

assets != cash. Also, if the cash reserves die out, they will probably fall short of the reserve requirements in place.

I didn't say (write actually) that assets are cash.

I asked who would force the banks into bankruptcy and suggested that not doing so (immediately) might have been better than a total financial system collapse, which was supposedly the only other alternative to the massive cash infusions.

When I run out of cash or my liabilities exceed my assets (short term or long term), no one shuts me down immediately. I keep collecting cash and spend it as it comes in. The folks who I owe money to aren't happy when I skip payments, and eventually that affects my ability to do biz on anything other than a cash-basis, but there's no immediate shutdown.

In fact, most US bankruptcies are initiated the debtors, not the creditors, so the debtors can get out of unprofitable deals. (This isn't true in the UK.)

But we treat banks differently. As soon as they reach certain financial "targets", we shut them down. This is a choice that has consequences.

These aren't just banks. These are all corporations in the modern world, period. Everyone from Target to Citi issues notes in the money markets.

And yes, the banks are required to have more assets than liabilities. But that has nothing to do with the money markets or day to day operations.

Here's a crappy, but workable analogy. What do you do in a modern computer? Have enough money for all the programs that are running, up front? Or do you have some shared virtual pool of memory?

The money market is kind of like that. It's silly for each and every corporation to have all the cash on hand it needs for day to day operations. That would require a lot of money that would be sitting around doing nothing. A much more efficient system is to have lenders who dole out short term loans (that pay darn little but are almost guaranteed to pay back) to the corporations as they need them.

Suppose that January is just a nasty month, and Target has to dole out lots of money to its health insurance benefits. That's fine, they'll just issue more commercial paper, and it will all work out when they tally up the bills at the end of the quarter.

Without that money market, what would happen instead is that Target would either have to keep a lot more money lying around, or run into a brick wall if something bad happened. It's like forcing everyone to buy many times more memory for their computer than they would need in everyday situations.

Without a functioning financial system, a modern economy can't grow.

This is a good line - with all the (justifiable) negativity around at the moment it's easy to forget that we still need (good) finance to move forward.

I wonder how long people will say "called their fund managers" when really most just use their dedicated app or log into a website and click a few things.

When you're talking about wealth in the multi-millions and even billions, many people do employ money managers. I have friends who work at small money management firms that have only one or two clients.

> And if we reached a point where people couldn't even get money out of ATMs, > we're talking about complete social breakdown.

And in a country like USA it would mean a civil war. People have a tendency to freak out too much, like post 9/11. I don't see the Argentinean-style civil protests and spontaneous grassroots organizations. I'd bet on dog-eat-dog. (I write this with sadness.)

Come on, sure it would be hard on people, but it would not mean a civil war. --Exactly who do you think would be fighting who? The government would be doing all they could to get people access to their money, and while there will always be idiots out there, the population isn't quite as stupid as you might like to believe (even though a majority technically voted for Bush once).

Only one broke the buck, the Reserve Fund. And they shouldn't have been anywhere near risky Lehman debt. That's what sparked the run-- people wanted out of the Reserve Fund and other investors were freaked that other money markets holding similar risky paper. The situation was fixed directly with a federal guarantee for money markets-- but the example was used as part of the fear-mongering to pass the TARP, which has absolutely nothing to do with money markets.

Also money markets/commercial paper debt markets are important to all businesses issuing short term debt, not just financials.

Sometimes I wonder what would've happened had corporations actually found the commercial paper markets totally frozen (as opposed to mostly frozen) and themselves unable to finance daily operations. Would they really say "Okay everybody go home, we have no money" or would they say "Well fuck, nobody knows if hey're gonna get paid, but we got nothing better to do, so we might as well continue doing business."

The economy as a whole seems remarkably resilient considering that it's all built on confidence. In cases where trade completely collapses, firms often "evolve" an alternative currency - scrip, cigarettes, foreign currencies, paper ledgers. I wonder if established firms with longstanding business relationships would've just said "Well, nobody can get cash right now, but I'll make an entry in our Oracle database and we can sort out the mess later."

mattobrien's explanation was awesome. A lot about the current crisis was demystified for me in an episode of This American Life: http://www.thisamericanlife.org/Radio_Episode.aspx?episode=3...

I'd recommend this to anyone who's looking for a well-explained overview. Set aside an hour or so to give it a listen.

call me a cynic, but has anyone actually verified that what this guy says is correct..

i worked on a trading floor at a major US bank and i have a degree in economics. its sometimes mind boggling to see the lack of knowledge of some of these senators.

to put it in a tech perspective, remember back to the "series of tubes.."

Googled around - these are my findings.

1. The Fed publishes -several- press releases every day. They report on the most mundane issues (meeting times, etc) up to their financial decisions. So this event must have been mentioned in a press release.

2. The best match I found was this one: (http://www.federalreserve.gov/newsevents/press/monetary/2008...). If it is about the same event, they described the crisis as "elevated pressure in U.S. dollar short-term funding markets." Response: $180 billion dollar increase in swap lines by the Fed.

This press release was posted on Sept 18th this year, the date of the supposed catastrophe.

3. I couldn't find a single reputable news source or agency that even hinted at a possible catastrophe.

For your amusement, Google "federal reserve 550 billion" and watch the Ron Paul references fly by. Considering the lack of supporting evidence I think it's safe to say the world wasn't about to end on Sept 18th this year.

Were you seriously looking for the word "catastrophe" in federal reserve press releases? Try to keep in mind that the DJIA can collapse if the fed chairman has the hiccups--so, they tend to wrap everything in "fedspeak"

http://www.youtube.com/watch?v=0liegrixknA

...what really happened was that the fed gave FDIC-style assurances to the money markets, which are not regulated in the manner of FDIC-insured commercial banks. That sounds boring as hell, I know.

Of course I wasn't searching for "catastrophe". I've read the book. It's better than the youtube clip.

Just imagine what would happen if any central bank (it doesn't even need to be the fed) issues a bulletin with "catastrophe" in it...

I'm not sure about the 550 billion number, but there was a run on the markets that week. On September 19th, the US Treasury put in a guarantee on money market funds [1]. The commercial paper market froze that week as well. That alone put the US economy near complete collapse. Figures such as 3 hours are somewhat arbitrary, but don't dismiss the seriousness of financial crisis that week in September.

[1] http://www.ustreas.gov/press/releases/hp1147.htm

Great Britain was very close to complete banking collapse on October 10th too. http://www.dailymail.co.uk/news/article-1127278/Revealed-Day...

Isn't this article just saying, "if the Fed had chosen not to fulfill one of its basic duties to act as a circuit breaker in the event of a banking panic, there would have been a calamitous banking panic?"

i think its saying "we came closer than we ever have to the Fed not being able to fulfill one of its basic duties"

I guess I'm asking, where is the evidence that the Fed was close to not being able to fulfill its duties? The story reads to me --- and what do I know? of course --- as "The Fed saw a problem, tried Plan A, and when that failed, used Plan B to solve it".

yeah i hear what you are saying.. my takeaway from a quick read was that it was a timing thing, as in if someone didn't move when they did we would have had a problem..

Holy freaking cow! I've not heard anyone explain/disclose the details of what actually happened before. Cheers to Representative Kanjorski for disclosing the details. The government shouldn't keep secrets.

Noble sentiment, but if people knew this was going on at the time, it would have likely exacerbated the situation.

Indeed... this is worse than shouting "Fire!" in a crowded theatre. In fact, it's like shouting "Deadly stampede!" - if that makes any sense...

I'll only point out that this happened last September. It's the first I've heard about the details. It's not shouting "fire", it's waiting four months to explain why there's a burnt-out hole in the ground where the theater used to be.

I was replying to "The government shouldn't keep secrets". That's wrong - it should keep the secret, until most people are out of the theater.

But as I said, its four months later. Government shouldn't keep secrets from it's citizens in general. You're the one who introduced the hysterical shouting of "fire." The Bush administration increased the level of secret keeping massively and look what we've gotten for it. Don't you think what happened in September should inform the decisions being made this week about the continuing bailout? Four months is way too long for this to be kept quiet. I'm glad a US representative is talking about it now but wish it had come out three months ago. Fortunately, we have a new administration now and they've already begun the change:

http://www.propublica.org/article/obama-begins-rollback-of-b...

IMHO, the best thing they could do was keep this thing secret while they figured out a way to solve the problem. Not that I think the whole problem was fixed, but this specific problem was fixed. Had the general public been aware, the problem would have been much worse, and John Q. Public would start pulling money out, and shoving it in his mattress, because he didn't understand what was happening. That's why it's called a Panic.

Also IMHO, a lot of the current economic problems have to do with turning on the news every night and seeing "how bad" the economy is and "it's getting worse." Seems like a self-reinforcing problem to me. That's what happens when you make the public aware of the "problem," when they don't understand all the gory details.

As far as the Bush-bashing, and the information not being able to inform current decision making, that's crap. The people that need to know, do know.

Unfortunately, the panic was in large part caused by secrecy, as people realized that many "money good" assets had actually been losing value for over a year, and that the government had been colluding to try to keep anyone from ever finding out.

Look up "level 3 assets".

Are you saying that you shouldn't yell "Fire!" when there's a fire? Sure, maybe you can probably put it out, but it's generally a good idea to get everyone out of a burning building until it stops burning.

Hmm, now I need to relate this to the economy somehow... uh...

This incident was widely reported at the time.

On Sep 26, President Bush said "We got a big problem" http://blog.mint.com/blog/wp-content/uploads/2008/11/visualg...

Thank goodness we have computers to track this stuff.

I wonder how long it took to see the sell-offs before the subsequent collapse in the 30s?

EDIT: I didn't mean to imply that we're near a depression. I was think about how technology helped us. Thanks makaimc.

I just read about this over the weekend in John Kenneth Galbraith's book The Great Crash. The ticker tape machines were about 3 hours behind in most parts of the country and that caused a massive sell-off as people tried to get out of the market even though they did not know the current value of their stocks.

Have you found anything similar that talks about Japan in the early 90s or argentina's collapses? I'm trying to find good parallel examples,

s/World/Current Form of the Economy/

Close enough for the millions that would die in the resulting unrest.

The current recession is edging on the side of depression, and I don't see any small-scale riots going on. How do you figure millions would die from "unrest"? Most people in the developed world are too complacent to really get angry and kill each other, and killing a million people is a surprisingly tough job to do without the assistance of nuclear weapons or national war machines.

Maybe I'm just misunderstanding the gravity of a collpase, but I don't remember reading about people spontaneously murdering each other and looting after Black Friday in 1929.

I think we are still piling feathers on the camel's back. Americans are also very unused to rioting, in general. It isn't part of their consciousness yet.

And I think it's ineffective to compare this to 1929. It certainly won't be exactly the same. It could be better, or it could be much worse.

If the economy collapsed tomorrow, where would you get your food? Would you starve to death first, or attempt to murder your next door neighbor, who lives alone, to feed your family? Would he kill you first?

I don't get it (literally, please explain). What happens when the "economy collapses tomorrow"? Do cows stop producing milk? Do factories stop making iPods? Do truck drivers stop driving food to supermarkets?

If you were not going to get paid would you drive your truck to market or milk your cows?

If they stopped how long do you expect it would take until food production and delivery where nationalized?

Money might seem all powerful, but it's less important over the short term than people with tanks.

What happens when the "economy collapses tomorrow"?

It's horrible. The world becomes a combination of the movies "28 days later" and "Mad Max," almost instantaneously. The only glimmer of hope is roving bands of freedom fighters grown out of the ranks of former bloggers who had the prescience to comment frequently about gold-backed currency.

Funny you should worry about factories producing iPods, I'd be more worried about a continued supply of clean water, food and energy in that order. And yes, cows may stop producing milk if the milk gear does not work anymore, how many people still milk their cows by hand.

I can see a lot of use for a crash course in basic farming in a situation like that, iPods not so much...

A world without iPods is not a world in which I could permit myself live.

Oh, they'll be there, they will just be collectors items, and replacement batteries might be a bit harder to come by....

I will add a quote from Arrested Development made by Buster:

Michael: Buster? The guy who thought that the blue on the map was land?

Lucille: He's had business classes.

Buster: W-w-w-wait. Eighteenth-century agrarian business. But I guess it's all the same principles. Lemme ask you: Are you at all concerned about an uprising?

And with that line of thought, you're going to see a lot more gray markets open up for things like that, especially if the trend of protectionism continues its course.

No , but the links between economic entities will collapse. Cows will produce milk but no one will come to deliver it to the stores for example.And actually cows will stop producing milk at some point because you will not have food to feed them. Look at the history books on Soviet Union collapse , it was very bad but it was not devastating as wars are...

I will explain. I have been through two total economy collapses in my life. My country collapsed twice, once in 91, when the communist regime was overthrown, and again in 97, when total financial collapse, plus social unrest happen.

In 91 there was violence, but few deaths. But I remember I had to stay in line for bread, at 10 yo, pushing and shoving to buy some, otherwise no food for me and my family. This wasn't not because we didn't have money, but because there was no food. Since everything was provided by the government, and the government seized to exist, things got really bad. The EU had to step in, and help us with basic necessities that year.

Then in 97, happen a total economic collapse. A huge ponzi scheme (think Madoff x3), where a lot of people of an already poor country, lost a lot of money, and the government was corruptly involved in it.

A huge unrest unraveled. The government send in the army to quell it but the soldiers were demoralized and refused to fight their own people, and just left. Army depots got looted, almost everybody ended up with AK-47s, grenades, you name it. There were no cops in the streets, you were on your own. Businesses will get looted, people that had money will be sent letters to pay money or they would be kidnapped. In the huge unrest, looting, settling of scores, and all the chaos, about 2000k people died, in the span of 3 months. Eventually a new government got formed, and things calmed down. Economy rebounded the next year, and things are getting better.

Now, you might think this doesn't happen in the US, but I should just remember you that Katrina was only few years ago, and look at the rape and pillaging that happen then. The LA rioting was only 18 years ago. Things like this can happen even in the us. If you have no money, b/c your bank failed, your credit card doesn't work, your are desperate, something got to give.

Desperation = people doing crazy things.

The reports of "raping and pillaging" during the Katrina crisis were vastly over exaggerated by the media.

http://www.reason.com/news/show/36327.html

I mean, the reporting was really over the top.

are you from albania?

yes

Argentina around 2001 could serve as example.

Cows keep producing milk, but that's not much good unless you live near the cows.

Factories stop making iPods since people don't go to work if they know they won't get paid. Likewise, the truck drivers won't keep bringing food to the supermarket. Which might not matter anyway if your bank has collapsed and you don't have any cash.

So after your food has run out, and you know your neighbour has food but doesn't want to share it with you, what do you think happens next?

A whole day? Why, I'd certainly kill my neighbors to avoid even 18 hours without nourishing my children. One dead neighbor isn't worth even a quarter millimeter of the stunted growth caused by a day without food!

What's your address again? (Just checking) :-)

I would eat everything in my cupboards, and by the time that was gone (let's just say a week), I'm sure I could kindly ask him if he has any to share.

By that time, everyone would be in the know that "shit just got real", so I'm sure there would be a lot of people who were actually concerned about other people being able to eat, and that it was counterproductive to lock their doors and shoot anyone who gets close. There are also people in modern society who are paid full-time to patrol the streets and keep the peace; while I know they can't be everywhere at once, they could probably maintain a non-catastrophic level of security, and would be joined by vigilantes and other decent-minded people who just want everyone to get out of the situation alive. I know that's what I'd do in such a situation.

I wonder why you didn't even entertain "sharing" as a possibility, I think it shows an unnerving level of innate psychosis in the human race, like we're all just itching for an excuse to smash our neighbor's skull open and drink their blood. Grow up.

This exemplifies the hysteria that my comment was trying to downplay.

The World [as we know it]

this story is bullshit linkbait guys. can we please stop upvoting apocalyptic crap? when the economy rebounds the apocalypse bloggers will go back to milking other sources like mayan calendars.

http://ftalphaville.ft.com/blog/2009/02/10/52272/within-24-h...

i saw the c-span video which is what everyone is referencing.

Can anyone explain why this activity wasn't reflected in the stock market? The DOW had a +400 point gain on Sept 18th.

The money was coming out of money market accounts. If the DOW went Up 400 pts, perhaps the money was going /from/ money markets and /to/ the market.

If true it certainly highlights the paranoia of the day. Keep in mind, the DOW lost approximately 800 points in the three days preceding Sept 18th. Were investors in such fear of a banking collapse that they chose to divert funds from "secure" money markets to the insanely volatile stock market?

The DOW is a horrible measurement of what's going on in the economy. Don't use it.

i'd be curious what pg has to say about all of this. does he take the gary vaynerchuck approach and say "put your head down and crush it, it's going to be fine tomorrow" or does he think it should become part of a startup founder's thought process?

i personally am interested in economics and banking (i enjoy reading the conspiracy theories too), but after a while i wonder why i worry about it. the more i worry about that, the less i get to focus on a startup.

It would be foolish to worry about an apocalypse when you're not sure it's going to happen. Instead, worry about why your users have to click three times instead of two.

I guess there are always apocalypses (apocalypti ?) hanging around. Killer bees, asteroids, sudden catastrophic climate change, killer cosmic rays from a supernova, some freak of physics, accidental nuclear war (or deliberate), some big volcano and so on...

Of course the real danger for a personal apocalyse: getting in your car and driving. We live with it every day. No big deal.

Yeah. Good thing startup founders don't drive much. I haven't gotten gas in a month.

Hmm... new YC tagline? "Avoid death while saving on gas!"

By definition, there is only one apocalypse.

I like this comment: ”Great. We have a system that cant be saved and cant fail.”

ahh snap, so close, we'll get'em next time.

Auntie Em! Auntie Em! Where are you Auntie Em!

Sigh... this is why you can never trust a Republican. Putting people who don't want government to work in charge of making government work has lead pretty directly to the financial disaster in which we find ourselves. The Democrats are no angels, but it was a Republican president and a Republican congress and a Republican chair of the Fed and a republican head of the SEC and a Republican head of the CFTC and on and on that fiddled for the last 8 years.

This post was down-modded so far I shouldn't even respond, but I'm going to anyway. While you seem to blame Republicans for every thing that ails you, keep in mind that the "loosened regulations" on mortgage lending which is what caused this problem in the first place were initiated by a Democrat, Barney Frank, at the urging of a Democrat, Bill Clinton. Now go put your head back in the sand.

Both of those posts are being downmodded because this is not the place to have a "democrats versus republicans" debate. Keep that stuff on reddit, thank you.

Fair enough. I apologize. No more political comments from me.

This is why I love HN. Don't ever change.

We can swim that far!! Lay on your back. Kick with your feet. Swim... Breathe, it keeps your chest elevated and your nose out of the water. Boats are coming if we need them, we'll make it.

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