Editor’s Note: Last week, we featured a graduation speech from Agora Inc. founder (and Mark’s business partner), Bill Bonner. It garnered such attention, that we’ve decided to share another important lesson from Bill’s life and experiences with the PBRG community…
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From Bill Bonner, editor, The Bill Bonner Letter: September 15, 2008, was a really bad day on Wall Street…
Lehman Brothers sought Chapter 11 bankruptcy protection. The Dow plummeted more than 500 points.
Putnam Investments shut down a $12.3 billion money market fund. Mizuho Trust & Banking cut its profit forecast in half. And the New York Stock Exchange halted trading in Constellation Energy, after its stock dropped 57%.
But this was just the start, not the end…
The day the cash disappeared
The following Thursday, the Federal Reserve noticed an odd and alarming trend: Cash was disappearing. Outflows from money market accounts topped $550 billion in less than two hours.
If that had continued, Representative Paul Kanjorski of the 11th congressional district of Pennsylvania recalled:
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The Treasury opened up its window to help and pumped $105 billion into the system. And it quickly realized it could not stem the tide. |
We were having an electronic run on the banks. They decided to close down the operation… to close down the money accounts.
If they had not done so, in their estimation, by 2 p.m. that day, $5.5 trillion would have been withdrawn. That would have collapsed the U.S. economy. Within 24 hours, the world economy would have collapsed.
We talked at that time about what would have happened. It would have been the end of our economic and political systems as we knew them.
People who say we would have gone back to the 16th century were being optimistic.
Neel Kashkari, the man fellow Goldman Sachs alum Hank Paulson appointed to oversee the Troubled Assets Relief Program (TARP), elaborated. He was talking about what didn’t happen in 2008:
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Literally, your ATM wouldn’t work. You’d type in your code, and no money would come out. You’d get your paycheck; you couldn’t cash it. |
“The money was so tight that ATMs could have stopped working. It could have really gotten out of control,” adds Lawrence McDonald, co-author of the New York Times best-seller, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman.
“I want you to go to the ATM…”
Few people grasped what was happening: For the first time in history, a credit-based financial system was melting down.
And those who understood it least were those in control of it.
Announced then Fed Chairman Ben Bernanke on June 10, 2008:
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The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so..” |
Although Bernanke had no idea what was going on, some people did. One of them knew what to do, too:
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On Friday night, I called my wife and I said, “Brooke, I am not coming home this weekend. I will call you on Monday. Tonight, I want you to go to the ATM, and I want you to draw out everything it will let you take. And I want you to go tomorrow, and I want you to go again Sunday.” |
Richard Burr, a U.S. senator from North Carolina, was convinced, he said, “that if you put a plastic card in an ATM, the last thing you were going to get was cash.”
Every financial system must encounter stress from time to time. The shock of 2008 was severe.
But it never got to the level that Senator Burr feared.
Next time, we predict it will. And then some.
Because the tensions, imbalances, distortions, and malinvestments that caused the 2008 meltdown are much worse today than they were then.
And the same clueless people are still in charge.
Vanishing cash
By some measures, the U.S. stock market is more overvalued than it was in 2008.
There are bubbles in auto loans, student loans, biotech stocks, and corporate bonds.
And there is $8 trillion more in public and private debt in the U.S. alone.
What’s more, the Fed has already played the ace up its sleeve. It has sucked up roughly $4 trillion in Treasury bonds, as well as in Fannie Mae, Freddie Mac, and Ginnie Mae mortgage bonds. And it has held short-term interest rates on the floor for the last six years.
And there they have stayed, doing nothing but further enriching the rich and further distorting an already grotesque and unnatural economy.
Next time a crisis comes, millions of people will take the advice Senator Burr gave to his wife…
They will rush the ATMs.
And dollars—old-fashioned paper greenbacks—will vanish.
More to come…
Regards,
Bill
Reeves’ Note: Bill recently released alarming research to his Bill Bonner Letter subscribers. It detailed how the future of America’s debt-based system will end with one sudden, disturbing event. Be sure to read Bill’s presentation, right here.