Squaring the Culture

The blog talk this morning seems focused on a C-Span interview with Rep. Paul Kanjorski (D, PA 11th District) who is the Chairman of the House Capital Markets Subcommittee. Rep. Kanjorski claims that the $700 billion bailout package that gave Treasury Secretary Paulson such latitude was a response to an electronic run on the nation’s banking system. I have not been able to verify this — I’ll explain below — but if it’s true, it certainly explains a lot of things that have lacked explanation for several months.

Listen to Rep. Kanjorski first:

I’m a bit over my head here, struggling to get past “I know a run on the banks is a Very Bad Thing® but I’m only vaguely sure why.” The general idea is that the banks quickly lose their assets and have nothing with which to lend, which leads in turn to other business operations lacking the funds for daily operations, which causes cascading business failures, which leads to a general collapse and massive poverty. Rep. Kanjorski’s “end of the world” rhetoric rests on the idea that if so much money leaves the banks so rapidly, they simply have to go out of business, and without banking, there’s no way for a complex economy to run. I expect “currency collapse” occurs in that scenario as well, which moves us immediately to a barter economy, and you can’t run a large national economy on barter; we’re all far too specialized, and there would be massive starvation before we arrived at a place where there’s a stable unit of value for our labor. A large national economy requires banking and a stable currency. If somebody reading this understands it better than I, I’d appreciate a response in the comments section.

The problem is, Rep. Kanjorski’s numbers don’t make sense. He says the money market accounts lost around $550 billion in an hour on Thursday “around Sept 15″ (the Thursday was actually Sept 18). At around the 1:08 mark, Rep Kanjorski says that if the Fed had not closed down trading, they estimate that $5½ trillion would have been drawn out of the money market system by 2 PM.

These numbers are far larger than anything reported in the newspapers from the following days, and larger than the known value of money market investments overall. For example, we have this report from RealClearMarkets from Sept 19:

Industry watcher iMoneyNet said investors pulled $224 billion from money-market funds in the seven-day period ended Thursday. On Wednesday alone, about $89 billion was taken out, and another $56 billion was withdrawn on Thursday, said iMoneyNet Managing Editor Connie Bugbee.

$224 billion in 7 days is a huge sum of money, but it’s nowhere near the $550 billion in an hour reported by Rep. Kanjorski. RealClearMarkets further reports the size of the total money market investment market:

Assets of institutional money-market funds dropped by $173 billion to nearly $2.2 trillion over the seven days ended Wednesday, while assets in retail money-market funds grew by nearly $4.3 billion in the same period to $1.2 trillion, according to the Investment Company Institute.

According to this report, the total of money market investments, including both retail (personal banking) and institutional (banking by pension funds and investment banks) markets, comes to $3.4 trillion — less than the $5½ trillion Kanjorski claims the Fed estimated was going to be lost. RealClearMarkets’ numbers are confirmed by the New York Times report from Sept 19, the Friday after the Thursday events Kanjorski describes. Beyond that, the run was apparently primarily among institutional investors, and primarily aimed at money market mutual funds, which means the total market size was only about $2.2 trillion, less than half the size of the loss Kanjorski reported.

Salon.com notes the discrepancy, and notes as well that Rep. Kanjorski is one of the Democrats from the House who voted against the House’s version of the recent stimulus bill.

Meanwhile, Sweetness and Light actually believes the run on the banks was the result of a Democratic plot, and asks “Does anyone know what Mr. Soros was doing that day?” I resort to Occam’s Razor here; the failure of Lehman Brothers produced a nearly unheard-of loss in a major money market fund called Reserve Primary Fund, such that money market investors, who usually accept minuscule returns because money market accounts never lose money, were suddenly looking at their $1 worth of investments being worth only $.97. That’s enough to explain a fairly serious and sudden withdrawal of funds; we don’t need to resort to Mr. Soros or devious plots to explain the event.

However, we do need an explanation. What on earth is Rep. Kanjorski talking about? Did he just flub the numbers, or does he know something we don’t? And why on earth would an event like this not have made the newspapers?