Did an invisible run on banks kill the economy?


By Patrick   Follow   Wed, 26 Dec 2012, 9:58pm   1,635 views   25 comments
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http://www.bostonglobe.com/ideas/2012/12/23/did-invisible-run-banks-kill-economy/6iOOVDEKDDjHEs36yGIawL/story.html

The answer depends on another question: What caused the crisis in the first place? Fault for the crash lies, according to various popular theories, with some combination of over-leveraged banks, a culture of greed on Wall Street, the collapse of mortgage-backed securities, and financial institutions that are too big to fail. But according to Yale University economist Gary Gorton, all of these explanations are wrong, and regulators have done nothing to address the underlying cause of the meltdown. In “Misunderstanding Financial Crises: Why We Don’t See Them Coming,” published last month by Oxford University Press, Gorton argues that the true...

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  1. iwog


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    1   10:34pm Wed 26 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike  

    I'm not sure it was all that invisible. I remember there was lots of talk of a massive run on money market funds which led to the emergency treasury actions of 2008 and Paulson's inept handling of the whole affair.

    The truth is that corporations who handle amounts of money larger than the GDP of most nations are capable of wrecking havoc and destruction on the world's economy. Period!

    Proposing legislation to reign in this power is like trying to keep your china safe while housing an elephant in your dining room. The problem is not a lack of regulation, the problem is size. Free people cannot allow concentrations of wealth like this lest they be marginalized into nothing more than pesky gnats.

  2. Kevin


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    2   10:42pm Wed 26 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    iwog says

    The problem is not a lack of regulation, the problem is size.

    That's why we need regulation limiting the size / scope of financial institutions.

    Do we really get any advantage out of national / international banks? Do whatever efficiencies these create over regionally restricted S&Ls / credit unions outweigh the risks?

    What about limiting which products a company can offer? Is there a compelling reason why companies that trade stocks should be allowed to operate as a S&L?

  3. iwog


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    3   11:03pm Wed 26 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Kevin says

    That's why we need regulation limiting the size / scope of financial institutions.

    We've done exactly the opposite for more than 30 years.

    My feeling is that any attempt to revive anti-trust actions and interstate banking limits will result in billions of dollars thrown at both propaganda and buying government officials. It would be an all out class war.

  4. Kevin


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    4   11:38pm Wed 26 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    iwog says

    Kevin says

    That's why we need regulation limiting the size / scope of financial institutions.

    We've done exactly the opposite for more than 30 years.

    My feeling is that any attempt to revive anti-trust actions and interstate banking limits will result in billions of dollars thrown at both propaganda and buying government officials. It would be an all out class war.

    That doesn't mean it can't be won.

    AT&T and standard oil spent a crapton trying to maintain their positions, and they lost. If the will of the people and the will of the government are aligned, these things can be fixed.

  5. bg


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    5   11:43pm Wed 26 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Kevin says

    That's why we need regulation limiting the size / scope of financial institutions.

    iwog says

    My feeling is that any attempt to revive anti-trust actions and interstate banking limits will result in billions of dollars thrown at both propaganda and buying government officials. It would be an all out class war

    This thread reminds me of some SciFi movie where the humans realize the computers have taken over, but only after it is too late to unplug them. Do you think we actually have any power to impact corporations left? It feels like they own us.

  6. Kevin


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    6   11:59pm Wed 26 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    bg says

    Do you think we actually have any power to impact corporations left? It feels like they own us.

    Yes. Acting like things are worse than they've ever been is ridiculous. Corporations had far more power over this country in the gilded age than they do now.

    Things have been both better and worse in our nation's history. Every time they've been bad, there have been people going "OH I GIVE UP THERE'S NOTHING WE CAN DOOOO"

    ...it's inevitably people who have never actually tried to do anything!

    Nothing gets done by people who don't do anything. Change comes from people willing to protest, to fight, to boycott, and in extreme cases even to die for their cause. It has happened before and it will happen again.

    There has NEVER been a period where people had power when they didn't take it. There was no golden age where companies had to play by the rules and treat citizens well. This power struggle is what nearly turned the whole world communist in the 20s and 30s before the great social programs swooped in to save capitalism.

    Sadly, too many dipshits forget this. On the one hand you have people who think things can only get worse, and on the other you have people who think that we need to end those social programs because they're TURNING us communist.

    It's like nobody paid attention in highschool american history.

  7. taxee


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    7   5:15am Thu 27 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    I thought it was a simple looting arranged by economists.

  8. Quigley


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    8   9:13am Thu 27 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike  

    Here's what happened. Lying and cheating by Wall Street investment firms made for most banks being way over invested in bad mortgages or mortgage securities. A panic arose as financial institutions stopped trusting each other or anyone else. The consumer paper market dried up overnight as a result. Now, companies who relied on revolving loans for operating capital no longer had the money to do business. The shakier ones went out of business quickly. Bigger stores like target and Walmart just sold nearly everything on their shelves (remember how little inventory there was to buy in 2008?) to get capital to make more orders for goods. Meanwhile, this lack of capital to purchase goods led to an extreme drop off in factory orders. This led to mass layoffs of workers. This fed the cycle of reduced consumer buying of goods, which meant that sales loved even slower and more layoffs happened.
    It took a good 9 months for companies to acquire enough working capital to purchase inventory at previous levels, and those months killed the economy. By mid 2009, business was normalized, companies had reserves of capital to operate on, and factory orders were up, but people were still out of work. Over the next few years, employers made good money due to increases in productivity and lowered wages paid. They were reluctant to hire more people or pay more. Capitalizing on high unemployment, companies made jobs contingent on high productivity and slashed benefits because they could.
    2012 saw some turn around in this trend, but it will take a few more years to bring back the economy fully.

  9. bob2356


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    9   11:15am Thu 27 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike  

    Kevin says

    It's like nobody paid attention in highschool american history.

    They didn't. Even if they did it wouldn't help much. High school American history is a bunch of whitewashed pc crap that has no relationship whatsoever to what actually happened in history. College level courses are worse. I picked the UTexas standard American history text book at a book sale and read it about 10 years ago. Pretty close to fiction. I'm sure some of the early history of American Indians was fiction. Where did they get the information to write hundreds of pages of detailed accounts of a society that had no written history?

    I was amazed to find no mention at all of the invention and development of the car, air plane, or computer as part of American history but there were 5 pages devoted to César Chávez and the rise of the hispanic labor movement in southern California. That was 2 pages more than the history of the US fighting of WWII. No mention of Patton, Bradley, MacArthur, Nimitz, or Halsey. After all what did they do that compared to important figures in American history like Chavez?

    People have no idea how corrupt and close the relationship between business and politics has been in the past. All the libertarians and right wingnuts see the past as some kind of utopian existence where business existed as an angelic force for good while being free of the evils of government. The US has almost always been a plutocracy of one form or another. It's just that today the resources are much more limited and the competition is much stiffer so it is more obvious. You no longer have the option of moving west if things get tough.

  10. thunderlips11


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    10   11:17am Thu 27 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike (1)  

    iwog says

    We've done exactly the opposite for more than 30 years.

    B-B-But, we can't control the size of banks, that would destroy our "international competitiveness on a financial level."

  11. thunderlips11


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    11   11:27am Thu 27 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    bob2356 says

    People have no idea how corrupt and close the relationship between business and politics has been in the past.

    The American Legion, the KKK and the Pinkertons, Sundown Towns, Haymarket Massacre, False Advertising to get people to the West, Teapot Dome, Carnegie Steel Strike, Pullman Strike, Haymarket Massacre, why the fuck is Labor Day in September instead of May 1st? etc. etc. etc.

    http://www.amazon.com/Lies-My-Teacher-Told-Everything/dp/0743296281

    Most history textbooks are utterly "Politically Correct". They name check what has to be name checked, turn the most interesting or controversial subject into bland bullshit. Betsy Ross and the flag isn't likely even a true story (the only evidence other than a claim almost a century later by relatives is a receipt for "Navy Colors" to her husband's upholstery store - no evidence she designed or even personally sowed the flag), but because she's a woman she gets multiple pages.

  12. bgamall4


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    12   1:33am Mon 31 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike  

    iwog says

    m not sure it was all that invisible. I remember there was lots of talk of a massive run on money market funds which led to the emergency treasury actions of 2008 and Paulson's inept handling of the whole affair.

    This was well known. The military tried to blame it on the Chinese. That is ludicrous. It was hot money that saw the collateral the banks were posting was crap. So this author doesn't have it right completely because the crap collateral was from the crap mortgages. Then the hot money got scared or intentionally pulled out or a combination of the two.

    The housing bubble was premeditated. The crash may have been premeditated or out of fear. I personally believe it was premeditated in response to the crap collateral that was placed in the money market system.

  13. fedwatcher


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    13   1:36pm Tue 1 Jan 2013   Share   Quote   Permalink   Like (1)   Dislike  

    1. The run-up was the expansion of the Mortgage Backed Securities (MBS) market. Its demand for mortgages to buy caused mortgage originators to neglect underwriting and created new buyers driving up home prices.
    2. By December of 2006 the shadow banks could no longer sell the lower rated MBS's they created and they started to pile up on their books. A loss of confidence resulted.
    3. By March of 2007 problems at Bear Stearns became apparant to any who did their homework.
    4. By extraordinary measures the Fed kept the financial system alive till late 2008 and TARP.

    It was a run on the shadow banking system that could have been predicted by their inability to sell product back in December of 2006.

  14. New Renter


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    14   3:48pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    Does anyone remember this episode of This American Life?

    It was originally broadcast in 2008 and gave IMO the best overview of the meltdown up to that point.

    http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money

  15. KILLERJANE


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    15   3:58pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    The checks were sent and the balances were ignored.

  16. mell


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    16   6:13pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    Bullshit, enough big banks would have folded without the bailouts. The remaining ones would have been deservedly big as they did prudently manage their money and the playing field would have been levelled for new, smaller and leaner banks to emerge with newer and more robust lending strategies. Instead we have the worst of the worst now TBTF and bigger than ever, propped up by Obummer (before that Bush) and the Fed.

  17. Kevin


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    17   6:43pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike (1)  

    The banks failing would have effected a lot more than the banks themselves. The bank bailouts had little to do with saving the banks; they were about saving the economy. If they just cared about the banks, Washington Mutual and Lehman Brothers would still be household names.

    The risks included, but were not limited to:

    - Massive costs to the FDIC, possibly rendering it insolvent, and thus triggering bank runs.

    - Even bigger contraction in credit, making it more or less impossible for any company that needs to operate even temporarily on borrowed money to survive.

    - Overall collapse of faith in the economic system, driving all forms of economic activity into the ground and rendering everybody bankrupt.

    It was a giant shit sandwich that we all had to swallow.

    The bailout wasn't the problem. It's the complete lack of follow through to prevent "too big to fail" from happening again that is the problem. Congress has completely ignored the calls from the very architects of the bailout on making it so that this can't happen again.

    It may be 20, 30, or even 50 years from now, but you can be sure that if we don't do something to restrict the size and scope of financial institutions, we'll be forced to repeat this stupidity again.

  18. mell


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    18   7:01pm Tue 1 Jan 2013   Share   Quote   Permalink   Like (2)   Dislike  

    Kevin says

    - Massive costs to the FDIC, possibly rendering it insolvent, and thus triggering bank runs.

    Non-issue, backed by the printing press and would definitely have totalled less than the bailout.
    Kevin says

    - Even bigger contraction in credit, making it more or less impossible for any company that needs to operate even temporarily on borrowed money to survive.

    Sure, shit happens, Time to rethink operating on borrowed money, esp. on an extended period.
    Kevin says

    - Overall collapse of faith in the economic system, driving all forms of economic activity into the ground and rendering everybody bankrupt.

    Nope, people and corporations with actual savings would have come out pretty well. This is the definition of being on the brink of bankruptcy, being in debt forever. Time to rethink that going concern strategy.
    Kevin says

    It was a giant shit sandwich that we all had to swallow.

    That's what Turbo Timmy and Hank said. Great fairy tale. Like a couple of days ago when Timmy sent another letter warning of dire consequences and harsh steps the fed would have to take if the debt ceiling wouldn't be raised. Rinse and repeat.
    Kevin says

    The bailout wasn't the problem. It's the complete lack of follow through to prevent "too big to fail" from happening again that is the problem. Congress has completely ignored the calls from the very architects of the bailout on making it so that this can't happen again.

    The bailout is the problem. Nobody cares about any regulations that might or might not follow, there's always a way around them. Only if you stop the instant gratification and let failures happen things may change.

  19. bgamall4


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    19   9:42pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    bg says

    This thread reminds me of some SciFi movie where the humans realize the computers have taken over, but only after it is too late to unplug them. Do you think we actually have any power to impact corporations left? It feels like they own us.

    Boycott credit. Live multigenerationally. There are ways to kick the banksters in the gut.

  20. bgamall4


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    20   9:45pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    Kevin says

    Yes. Acting like things are worse than they've ever been is ridiculous. Corporations had far more power over this country in the gilded age than they do now.

    They were not as unified worldwide and connected as they are now. The bankers and the corporations are far more connected now. Only a grass roots movement to not bite on their easy money will keep them at bay.

  21. bgamall4


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    21   9:46pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    fedwatcher says

    1. The run-up was the expansion of the Mortgage Backed Securities (MBS) market. Its demand for mortgages to buy caused mortgage originators to neglect underwriting and created new buyers driving up home prices.

    2. By December of 2006 the shadow banks could no longer sell the lower rated MBS's they created and they started to pile up on their books. A loss of confidence resulted.

    3. By March of 2007 problems at Bear Stearns became apparant to any who did their homework.

    4. By extraordinary measures the Fed kept the financial system alive till late 2008 and TARP.

    It was a run on the shadow banking system that could have been predicted by their inability to sell product back in December of 2006.

    This is exactly what happened in a nutshell.

  22. mell


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    22   9:53pm Tue 1 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    bgamall4 says

    This is exactly what happened in a nutshell.

    And what is different now?

  23. bgamall4


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    23   12:16am Wed 2 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    mell says

    Bullshit, enough big banks would have folded without the bailouts. The remaining ones would have been deservedly big as they did prudently manage their money and the playing field would have been levelled for new, smaller and leaner banks to emerge with newer and more robust lending strategies. Instead we have the worst of the worst now TBTF and bigger than ever, propped up by Obummer (before that Bush) and the Fed.

    Unfortunately, no one knows what would have happened if all the money market capital had left the USA. And the derivatives going wild could have destroyed the financial system as well.

  24. bgamall4


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    24   12:20am Wed 2 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    mell says

    The bailout is the problem.

    Unfortunately, you cannot prove that. The way the bailout gave too much away was a big problem, but the bailout calmed the money markets. A mass capital exit was taking place. The wealthy were holding our government hostage.

    No one knows what would have happened if all the capital left the US and the banks crumbled. I am for taking them down, one at a time, but no one knows if the banks dissolving all at once would result in a massive credit crisis.

    You say people should live without credit, I agree, but unfortunately, business cannot live without credit. Oh, you can take away credit from the smaller business and make the bigger business bigger. But is that what you want?

  25. mell


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    25   8:49am Wed 2 Jan 2013   Share   Quote   Permalink   Like   Dislike  

    bgamall4 says

    You say people should live without credit, I agree, but unfortunately, business cannot live without credit. Oh, you can take away credit from the smaller business and make the bigger business bigger. But is that what you want?

    I think even small(er) business should learn to live with less credit and only for short durations. Plus, they can try and get it from sources other than banks, such as 'angel' investors (don't like that name). I made a conscious decision to switch from working for companies depending on the big banks (and being their puppets) to working for companies of which most have never needed a single buck of credit, i.e. they were profitable from day one (or only needed their founders initial startup $$). They are out there although like you said it seems to be rather the exception right now.

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