Could a Modern Bank Run Trigger Another Economic Crisis?

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Broken]In summary, in September 2008, during the Great Recession, the Federal Reserve noticed a massive draw-down of money market accounts in the US, with $550 billion being withdrawn in just a matter of one to two hours. This led to a potential "electronic run" on the banks and the Treasury had to intervene by pumping $105 billion into the system. If they had not done so, it was estimated that $5.5 trillion would have been withdrawn and caused the collapse of the US and world economy. This incident highlighted the dangers of bank runs and the fragility of the economy. Some speculate that this event may have been caused by the bursting of the tech bubble in the 90s and the subsequent
  • #1
Esoteric
Sept 2008: $550 Billion Disappeared in 1-2 hrs in an "Electronic Run on the Banks"

Well, that's what Paulson and Bernake told Rep. Kanjorski (D-PA) anyway



For those who don't know, the Great Depression's economic damage was mainly caused by bank runs(en masse customer withdrawal of deposits).
 
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  • #2


Direct quote from the video...

"On Thursday (Sept 18), at 11 in the morning 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 was 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...
We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment."
-Rep. Paul Kanjorski of Pennsylvania
 
  • #3


Very interesting. I was commenting about the velocity of money just this morning before I left for work. On my drive, I was wondering if the converse of money flowing too slowly(a problem), had been replaced by money flowing too quickly(Soros).

Houston. I think we have a new problem. :smile:

5 trillion dollars!

Who's money was that?
I hear the Japanese have had lots of extra cash laying around.
Or maybe all those $4/gal recipients put their money back where it came from.

Interesting times.
 
  • #4


What was so special about that specific hour?
 
  • #5


jreelawg said:
What was so special about that specific hour?
$550 Billion was withdrawn from money market accounts in the US!
 
  • #6


Honestly I find those claims very hard to believe. The World economy could have potentially collapsed in one day, in September 2008, when the severity of the recession was still not fully known?

:rolleyes:
 
  • #7


So the money supply contracts for two seconds and the Federal Reserve finds it necessary to print money? When a bond is sold the money supply expands and when that bond is redeemed the money supply contracts but increases later on. The holder of a bond is garunteed with a certain amount of risk (default) the principal amount of the bond plus interest paid on the bond at the maturity date.

The US never defaults on its debt obligations, so we hear. However, here seems to be a case that claims otherwise, as stated by congressman Kanjorski.
 
  • #8


Quickly! Everyone read the following: http://en.wikipedia.org/wiki/Bank_run" , for an explanation of what is going wrong.

Before the Colbert people replace banks with elephants and money with pirates.
 
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  • #9


Ok, I have got to say that this claim lacks details. The congressman claims the $550 billion was withdrawn from US money market. Which money market is he referring, all markets, one in specific, the supposed aggregate total of US money markets, etc? It is not uncommon for such sums of money to leave the US money market, after all the economy is global, right?
 
  • #10


Werg22 said:
Honestly I find those claims very hard to believe. The World economy could have potentially collapsed in one day, in September 2008, when the severity of the recession was still not fully known?

:rolleyes:


Apparently someone did know.:eek:
 
  • #11


Esoteric said:
Well, that's what Paulson and Bernake told Rep. Kanjorski (D-PA) anyway



For those who don't know, the Great Depression's economic damage was mainly caused by bank runs(en masse customer withdrawal of deposits).


The root cause, seems to be the market, where taxi cab driver gave stock tips and people piddled away (as my dad would say) the wealth of a generation investing in glamor technology; blue sky stock. Something like the 90s, where we heard "We've broken the business model. The old rules no longer apply." Start-up companies were thick as flees. And the prices of stocks were not dependent upon dividends, but future expected value.

When this fantasy eventually broke, bringing down the whole market, this time around the Fed chose to loosen interest rates rath than let businesses fail. This action doesn't seem to have made any overall difference, but moved insolvent investments to the housing market.

The moral of the story seems to be, the pipper will be paid.
 
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  • #12


A few years after the stock market crash of '29 a nice little jingle came out. Now, 9 years ofter the crash of march 2000, and the resultant failure of lending institutions where double digit unemployment should follow, it is a cyclically appropriate tune--

The lyrics:

So long sad times
Go long bad times
We are rid of you at last

Howdy gay times
Cloudy gray times
You are now a thing of the past

Happy days are here again
The skies above are clear again
So let's sing a song of cheer again
Happy days are here again

Altogether shout it now
There's no one
Who can doubt it now
So let's tell the world about it now
Happy days are here again

Your cares and troubles are gone
There'll be no more from now on
From now on ...

Happy days are here again
The skies above are clear again
So, Let's sing a song of cheer again

Happy times
Happy nights
Happy days
Are here again!

The uplifting irony of this gay little tune, graced with interstitiall undertones of forewarning, makes this summary hit a gotta-hear-it-again.
http://kids.niehs.nih.gov/lyrics/happydays.htm"
 
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FAQ: Could a Modern Bank Run Trigger Another Economic Crisis?

What caused the $550 billion to disappear in such a short amount of time?

The $550 billion disappearance in September 2008 was a result of an electronic run on the banks, where panicked investors withdrew their money from financial institutions that were at risk of collapsing due to the subprime mortgage crisis. This sudden withdrawal of funds caused a domino effect, leading to the disappearance of such a large sum of money in just 1-2 hours.

Who was responsible for the electronic run on the banks?

The electronic run on the banks was a result of a combination of factors, including the lax regulations on the banking industry, risky investment practices, and the failure of major financial institutions. It was not caused by any one individual or entity, but rather a systemic failure of the financial system.

What impact did the disappearance of $550 billion have on the economy?

The sudden disappearance of such a large sum of money had a significant impact on the economy, causing a widespread financial crisis. The stock market plummeted, leading to a loss of wealth for investors and a decline in consumer spending. This, in turn, affected businesses and led to a rise in unemployment and a decrease in economic growth.

How did the government respond to the electronic run on the banks?

The government responded to the electronic run on the banks by implementing a series of measures to stabilize the financial system. This included bailing out major banks and financial institutions, injecting funds into the economy, and implementing stricter regulations on the banking industry to prevent future crises.

Could a similar event happen again in the future?

While it is not possible to predict with certainty, the measures put in place after the 2008 financial crisis have made it less likely for a similar event to occur. However, it is important for the government and financial institutions to continue monitoring and regulating the industry to prevent such a crisis from happening again.

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