Thursday, February 19, 2009

The Government Panic of September 2008

I now believe that the United States government went into full panic mode in September, 2008 and continues in panic mode to this day. This has serious implications for the future direction of the economy. Those in government who truly understand the current situation must have serious doubts as to whether the United States financial structure will survive in any form close to what it is today.

My case for this scenario has developed as a result of a number of factors including Congressman Paul Kanjorski of Pennsylvania blowing the lid off the fact that there were serious runs on money market funds back in September 2008, and the fact that the government, early on, took an active hand in trying to kill this news.

After the congressman's remarks on C-span, I noticed heavy traffic at EPJ from those who were conducting web searches for terms such as, "money market run September" and "money market withdrawals September 2008". It hasn't stopped. They all end up on a post I made back in September, 2008 regarding heavy redemptions that were occurring at the time in a money market fund, Primary Reserve Fund.

It turns out mid-September 2008 was probably the start of what could have turned into a major run on ALL money market funds, and I was the only one sniffing around the subject. So anyone searching the topic now would end up inevitably at my EPJ post. The money market fund run was so severe that it caused an immediate panic reaction by the Federal Reserve, a panic mode of operation that remains in tact to this day.

Here's what I mean. Back in early 2008, the oil price was climbing out of control on the upside, as were most other prices. On January 2, 2008 oil broke above $100 per barrel. Clearly, the United States was heading toward major price inflation. And despite the fact that Federal Reserve chairman Ben Bernanke did not acknowledge the seriousness of the inflation, he acted as though he was well aware. During the summer of 2008, for all practical purposes, he stopped printing money, thus battling the inflation.

This was the situation going into mid-September 2008, with earlier problems at Bear Stearns and Lehman still on everyones mind. Then a money market fund broke a buck, i.e., they would pay less than a dollar for every dollar invested. This was how I reacted to the news in a post on September 16:

Holy Sh*t: Money Market Breaks Buck; Freezes Redemptions

To me this was big news. Given the spooked financial markets, all we needed was to spook money market holders. The next day I wrote:

News that the Reserve Primary Fund, the oldest mutual fund in the country with $64 billion under management, has broken the buck and frozen resumptions for 7 days, is not good.

Edges of panic are beginning to appear throughout the system. There is a flight to absolute safety. 3-month T-Bills are trading to yield 0.558% ( yield not seen since 1954!). Gold, as I write, is up over $88.50.
This was looking big to me, yet I was looking frantically for news about possible panic, but there was little about money market stories outside of specific news on the Reserve Funds. In fact, stories about money market funds were disappearing! On September 18, I posted the following:

Things That Go Poof

From my iGoogle page, I monitor a number of news feeds.

The headline below, obviously, would catch my eye. The Fed is now backstopping the mutual fund industry and, yet, corporate officials are apparently still hesitant to park money there. My inquiring mind wanted to know more. I clicked on the story. Poof, Wham, Bam, Gone.

I even googled the first sentence. No luck the only link that shows up is the dead link. I hope the reporter survived.

File under Censorship?

Corporate Treasurers Remain Wary Of Money-Market Funds -
SAN FRANCISCO -(Dow Jones)- An explicit government guarantee of money-market funds will likely put a floor under the struggling $3.4 trillion market, but corporate cash that fled it won't be tempted back until both stability and yields rise...
Somebody didn't want a negative money market fund story out, somebody who had the ability to get to the media and shutdown the story. Guess who that might be?

Even the news on heavy redemptions at Reserve Primary was being buried. I wrote, also on September 18:

The news on redemptions at Reserve Primary is certainly being kept low key. The only reference to it that I have seen was buried in the third paragraph of a Bloomberg story.

The Reserve Primary Fund lost more than 60 percent of its assets to redemptions this week, according to Bloomberg. Now that's a run on a money market fund.
So what was really going on back in September? My guess is full-fledged panic by the government. The government took many actions, including killing significant coverage of the story.

Here is a rough transcript of what Congressman Kanjorski said on C-Span , recently (video here):

About...Sept 15 at roughly 11 AM The Federal Reserve noticed a tremendous draw down of money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two.

Money was being removed electronically.

The treasury tried to help with $105 Billion.

But could not stem the tide.

It was an electronic run on the banks

The treasury intervened but had they not closed down the accounts they estimated that by 2 PM that afternoon. Within 3 hours. $5.5 Trillion would have been withdrawn and collapsed, within 24 hours, the world economy.
So why do I think the government panicked at this time. During the same time period Kanjorski is telling us about , and with the reported problems at the Primary Reserve money market fund, the Federal Reserve completely reversed its monetary policy, without a word to anyone.Here is M2 nsa money supply growth on a week by week basis for the six weeks leading up to September 15:

August 11-- $7683 billion
August 18-- $7674 billion
August 25-- $7633 billion
September 1-- $7650 billion
September 8-- $7685 billion
September 15-- $7693 billion

Notice for the entire period, money supply grew by, roughly, $10 billion.

Then the following week, the week of the problems at Reserve Money Market, all hell broke loose. Money supply climbed to $7803 billion. An increase in one week of $110 billion!! The government panicked. Bernanke panicked. And BTW this confirms Kanjorski's comment that the Treasury added $105 billion. He's not an economist, so he can be forgiven for getting the technicals wrong. It was the Fed not the Treasury that added the funds, but his story checks.

Ever since then, the Fed has been pumping money[M2 nsa] at a rate near 20% annualized. In the summer of '08, it was climbing at 1.5%.

Folks, the government is operating in full panic mode.

If Bernanke stops printing, we're back in crash mode, if he continues printing at 20% rates, it's fierce inflation. Think about it, all the crooked adults are gone from the scene.The key Goldman Sachs players, Robert Rubin and Henry Paulson are gone. News came just yesterday that Goldman Sachs President and Co-Chief Operating Officer Jon Winkelried will retire effective March 31.

They are all crawling under rocks. They know what's coming. They have left as Treasury Secretary, a kid, who can't even get a press conference right. The president, even if given the benefit of the doubt that he is sincere, was brought up on socialist propaganda. He doesn't have a clue. The stimulus package is just the insiders raiding the till while there is still money in it.

Prepare for major financial turmoil, most likely inflation like you have never seen before. Judging by Bernanke's actions, the insiders have decided to go out Butch Cassidy and the Sundance Kid style, with the money pumps blasting.

Update: As I was putting finishing touches to this story, I attended a speech given by Fed chairman Ben Bernanke at the National Press Club in Washington D.C. Much to my amazement he mentioned the September 2008 period twice. Once in his prepared remarks and once during the Q & A session.

Here is his prepared comment about the period:
Together with other government programs, our actions to stabilize the money market mutual fund industry have also shown some success, as the sharp withdrawals from funds seen in September have given way to modest inflows.
Since the Congressman Kanjorski comments about the panic withdrawals, the Fed has obviously decided, given that we live in the the age of the internet, to simply go with the flow and act as though it was a known fact about heavy mutual fund withdrawals across the board. It wasn't. I was looking for such stories back in September because of the problems at Primary Reserve. They weren't there. But more important than acknowledgements of the withdrawals, is the panic it caused. It completely reversed Fed policy. The problems at Bears Stearns didn't do this. The problems at Lehman didn't do this. Not even the sub-prime mortgage crisis caused such panic. Congressman Kanjorski is right. It was an electronic run on the banks. If it had been allowed to continue, it would have resulted in trillions in withdrawals, the system would have collapsed. That's what caused Bernanke to within a matter of a couple of days completely change Fed money growth policy. The problem now is that he can't stop printing or the same threat comes back. He's trapped in a major monetary inflation spiral that will ultimately lead to a huge price inflation spiral.

Gold has been going up for a reason. My guess is the players, the Paulson's and Rubin's know what is coming and while they have "The Kid" Geithner run distraction plays, they are loading up on the yellow metal. It's the one thing that will survive the financial panic ahead. Gold won't melt in an overall financial meltdown. I hope you own some.


  1. Good work. Any evidence that Paulson & Co. let Lehman fail to create the capital flight situation and bring Bernanke on board with them?

  2. This explains a lot.

    I went back and checked, I see only hints to the panic. I see where they propped up the money market funds and pumped money in. Nothing more.

    Great reporting and analysis.

  3. Good article; I'm seeing more and better explanations of what happened in those critical September days. However, most of the new analysis leaves out the most important fact: the real run on the money market funds that drained more than half a trillion from the system in two hours happened on Thursday, September 11, 2008 between 9:00 a.m. and 11:00 a.m. (article,"September 11, 2008 -- America's Economic 9/11?" American Free Press)Does that date and time frame ring any bells? Many observers mistake the Monday, September 15 when Paulson and Bernanke went to congress in a cold sweat for the event itself. This was not just a run on the banks as many assume, it was the first-ever cyberspace financial attack that let Washington know exactly who had Uncle Sam by the short and curlies. That's why congress hurriedly and overwhelmingly passed the bailout in spite of the public being overwhelmingly opposed to it. They couldn't tell us why they had to pass it without also telling us about the attack. That's why the Kanjorski slip-up is so important in getting the truth out.

  4. Hi, I'm not an economics expert. I have spent hours going through Sept-Oct 2008 financial news sites. Like you, I see only hints to the panic. I see where they backed up the money market funds and pumped money in. There wasn't any mention of a major run. However, if you listen very closely to the tape, you may decide he was NOT talking about the withdrawals occurring on the 15th, but to the meeting with members of Congress being on the 15th. I think the run was on the previous Thursday, the 11th

  5. I've been tearing my hair out about this, and the horrific conspiracy theories arising out of Kanjorski's statements on C-SPAN, for a week... having to go so far as to give myself a big headache listening to the entire hearing where Bernanke and Paulson testified before the House Finance Subcommittee on 24 September. Kanjorski brought up the run in that hearing and Paulson and Bernanke were trying to respond to it, but Franks broke in about members having to get to a vote in ten minutes and no full discussion of the run ensued after the outburst/break-in by Franks. I have been wondering if that was a purposeful attempt to cut off the line of questioning, or just bad luck.

    Last night I watched online Frontline's disgraceful coverage of the meltdown, and not a peep. In fact, I'd been certain that the run on the 18th was what precipitated the meet with congressional bigwigs on that day, but Frontline presented it as though Bernanke had made up his mind for the bailout a day or two before... which, if true, could make the business about the run a scare tactic to get immediate attention to opening the spigots for the looters. They made it seem as though Paulson's possibly personal enmity problem with Bear made him desire to let them fail, and this decision was disastrous, causing more trouble than anticipated, creating the run which threatened the world [without mentioning the run in anything but the most wildly generalized terms].

    So, anyway, maybe your links here will help clear up the doubts I have left about chicken and egg. Thanks for not flipping out and blaming it on Soros, or the Mossad, or setting the date back a week to make it into a new 9/11 attack. My nerves are shot from the savagery arising out the hysteria mounting out here. The hysteria is born out of the covertness, their secrecy, whether they thought it was for our good or security, as much or even more than the fear of economic disaster, and it's time to start clearing it up instead of sinking further into the brutality of anxiety.

  6. Oh, I see a couple comments have come in since I was writing.


    Kanjorski was fuzzy about the date in the clip. There was a private meeting with congressional members on the 18th and a public one on the 24th where Kanjorski mentioned "the run on Thursday last".

    IT WAS THE 18th!

  7. Never forget that Congress passed legislation during the Clinton crime years that deliberately allowed these banks to engage in this financial chicanery, and that now Congress has voted to bail out these criminals ON YOUR DIME, while letting them go free with their golden parachutes, and refusing to charge them with any crimes at all.

    I don't think I have to explain what the Founders of this country would do to these people if they were alive today. Are Americans totally gutless? How can a nation of 300 million people stand around sucking its thumbs and watching these crooks rob them, their children, their grand-children and their great-great-grand-children blind in broad daylight, and allow them to walk around upright, and continue to breathe this planet's air?

    If the people of this country aren't prepared to do to these people exactly what they deserve to have done to them, the people of this country will deserve every goddamned thing they get. In spades.

  8. Had the Government let AIG go down the same weekend as Lehman Brothers, JP Morgan Chase would have collapsed too. It amazes me that Jamie Dimon & JP Morgan have been allowed to tout themselves as something good, compared to Citi & B of A. Jamie & JP Morgan are just as NATIONALIZED or TAX PAYER SUPPORTED as the other two banks if not more! Besides the obvious $25 Billion of TARP they have received in plain view they also received under the table $139 Billion from the government the week Lehman went down and $30 Billion from the Bear Stearns deal too.

    PRESIDENT OBAMA "Change you can believe in" kiss my ass you fricken phony! You are doing exactly the same crap the last administration did, (F-ck the tax payer for the boys on Wall Street). We are sick of it! Let the bastards fail, they deserve it! It doesn't matter any more the game is over so stop wasting our money!

  9. This was a very nice article. It was very informative. However did you ever find out who was making all the withdrawals from the money market accounts. This was niot the work of some little guy. To take out $550 billion in an hour and a half is the works of a large organization. It may be the works of another country. I would love to find out who was behind the withdrawals.

  10. @ JackM

    You have to keep this in the context of the period. With Reserve breaking a buck, many sophisticated operators such as hedge funds would most likely started pulling their money to protect it.

    My guess is that is where the redemptions were coming from.

  11. I get the same hits. Sometimes handfuls of them come in at once, sometimes it will be just one or two a day but I would guess that I have gotten hundreds upon hundreds LONG after the September story.

    I agree with you that they are now trying to play this matter off. This was HUGE (or "systemically important" to borrow Bernanke's own parlance) and should have gotten coverage when it happened. I was not aware of the censorship.

    I have heard it may have been the 15th of Sept, not 18th but I believe it was either Bernanke or Paulson who recently testified about late-night panic in money markets on the 18th. I believe "the 15th" is a deliberate attempt at disinformation. Who can say?

    And now? Where are we? Still full on panic?