
How The World Almost Came To An End At 2PM On September 18 - robg
http://zerohedge.blogspot.com/2009/02/how-world-almost-came-to-end-at-2pm-on.html
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ryanwaggoner
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.

~~~
mattobrien
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.

~~~
richcollins
> 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.

~~~
catch23
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.

~~~
richcollins
> smooth out their financial numbers

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

~~~
newt0311
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.

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jwb119
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.."

~~~
jd
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...](http://www.federalreserve.gov/newsevents/press/monetary/20080918a.htm)).
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.

~~~
mynameishere
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.

~~~
rbanffy
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...

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gaika
Great Britain was very close to complete banking collapse on October 10th too.
[http://www.dailymail.co.uk/news/article-1127278/Revealed-
Day...](http://www.dailymail.co.uk/news/article-1127278/Revealed-Day-banks-
just-hours-collapse.html)

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tptacek
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?"

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jwb119
i think its saying "we came closer than we ever have to the Fed not being able
to fulfill one of its basic duties"

~~~
tptacek
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".

~~~
jwb119
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..

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jdnier
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.

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

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

~~~
jdnier
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.

~~~
swombat
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.

~~~
jdnier
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...](http://www.propublica.org/article/obama-begins-rollback-of-bush-era-
secrecy)

~~~
pbrown
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.

~~~
Daniel_Newby
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".

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raghus
On Sep 26, President Bush said "We got a big problem"
[http://blog.mint.com/blog/wp-
content/uploads/2008/11/visualg...](http://blog.mint.com/blog/wp-
content/uploads/2008/11/visualguidecrisis2.jpg)

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jackchristopher
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.

~~~
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.

~~~
rrival
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,

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gruseom
s/World/Current Form of the Economy/

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

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nihilocrat
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.

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pavel_lishin
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?

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andreyf
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?

~~~
jacquesm
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...

~~~
Allocator2008
A world without iPods is not a world in which I could permit myself live.

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

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nazgulnarsil
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.

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rrival
[http://ftalphaville.ft.com/blog/2009/02/10/52272/within-24-h...](http://ftalphaville.ft.com/blog/2009/02/10/52272/within-24-hours-
the-world-economy-would-have-collapsed/?source=rss)

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

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

~~~
pj
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.

~~~
jah
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?

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jmtame
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.

~~~
palish
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.

~~~
michaelneale
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.

~~~
palish
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!"

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

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

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

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earl
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.

~~~
pbrown
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.

~~~
swombat
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.

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

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pj
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.

