The day the economy almost stopped?

A Democratic congressman says a devastating run on money market funds last September almost brought the entire world to its knees.


Andrew Leonard
February 11, 2009 12:35AM (UTC)

Fresh from Ben Smith, at Politico, an astonishing clip of Rep. Paul Kanjorski, D-Pa., chairman of the House Capital Markets Subcommittee, discussing on CSPAN the events of that fateful day last September when Ben Bernanke and Hank Paulson warned congressional leaders that "the economy would stop" if immediate action wasn't taken to stabilize financial markets.

An excerpt:

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On Thursday at 11:00 a.m. 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 2:00 p.m. 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.

The Thursday referred to was Sept. 18, 2008, the same day, the New York Times reported two days later, that Bernanke and Paulson told congressional leaders "that we're literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally."

That Friday, the Federal Reserve and the Treasury moved to backstop money market funds, but the numbers don't quite add up to what Kanjorski describes, reported the Times that day:

Money funds held more than $3.4 trillion in investor funds, as of the most recent industry tally released Thursday, down almost $170 billion from the previous week. The Treasury said concerns about the value of money market funds falling below the standard net asset value of $1 a share -- or "breaking the buck" -- had heightened the financial turmoil and caused severe liquidity strains in world markets.

So where did Kanjorski conjure those numbers from? And what to make of a politician who was in possession of such perilous information about the U.S. economy, but was one of a handful of Democrats to vote against the stimulus bill in the House? I am not sure, but if you want to hear it from the horse's mouth, watch the video:


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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