Where is the US economy headed?

Whats this September 18, 2008 run on the banks thing about? As talked about by Representative Kangorsky. Who was doing the money market withdrawals? 550 billion in an hour or two, and could have been 5 1/2 trillion in one day if not stopped?

http://zerohedge.blogspot.com/2009/02/how-world-almost-came-to-end-at-2pm-on.html

"On Thursday (Sept 18), at 11am 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 2pm 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. "

Read about this. The 5 1/2 trillion dollar is incorrect but the general gist is.

I think the money market withdrawals were an old-fashioned bank run. But there is the strong possibility of foreign meddling, I remember reading about that.

Cycloptichorn

Foreign meddling is what I am interested in. Or could somebody like George Soros be involved? No evidence, just curiosity.

Why would you look to Soros? He's lost plenty of money on this crisis just like all the rich investors have.

You don't honestly believe he's a boogeyman, like the Right wing makes him out to be. Do you? I mean, c'mon.

It would be like me alledging that Bush and Cheney were secretly behind it.

Cycloptichorn

No foreign meddling needed. Americans are perfectly capable of messing up their financial system. (Along with the rest of the world's financial system.)

I am not advancing a theory, just brought his name up as somebody that has tried to manipulate markets in the past. Perhaps he doesn't have enough money by himself anyway. I would more suspect Middle Eastern, or perhaps Russian connections to the withdrawals, heck, I don't know, I just find this fascinating.

okie, et al, love to bring up Soros as the boogie man who controls everything that he deems to be "liberal."

okie quoted :



those $550 billion sound like alot of money - but is it really ?
one would really have to know what the daily drawdowns are to make any judgement . what are the amounts that are being drawn down and deposited on a daily basis ?
btw . an average wouldn't be very useful imo . i imagine there are always wild swings in those amounts .

i'm sure that the treasury and the banks know who was doing "the dealing" . after all , these weren't bankrobbers with a facemask demanding cash .
those transactions and the dealers involved are tracked pretty carefully , so without a thorough explanation of the action and the actors , it's pretty well impossible to make any kind of judgement .

since many foreign countries have lent enormous amounts of many to the U.S. , this withdrawal may just represent a "blip" .

it would certainly be interesting to know more about it .
hbg

hamburger, I am trying to figure all of this out too, I admit to being a novice, but based upon what I think we know, 500 billion is no small percentage of the total amount of money supply in this country. So although I haven't found how much money is transacted as money markets per day yet, I think this is alot more than a blip. It appears to me from the following graph that it would nearly equal the total amount of currency in circulation, the green area of the graph. If I understand the graph, total money supply was around 20 trillion or 20,000 billion in 2006, so 500 billion would be 5% of that, no small percentage for a 1 to 2 hour period of withdrawal, that sounds monumental in my opinion. And if you look at it as a portion of money market accounts, no doubt it would be a far higher percentage, and this is money that has more liquidity than alot of the supply. And if you look at the total currency in circulation, 500 billion is a majority of that, the green part of the following graph. A troubling part of the graph is the white area, M1, which is on the decrease percentage wise. For descriptions of the portions of the graph, M1, M2, M3, etc., refer to the following site.

As a helpless okie out here in fly over country, I get the feeling, probably like most everybody, that we sit out here and work all of our lives while the elites running all of this stuff can tweak a trillion here, a trillion there, to their hearts delight. It must be a heady feeling. And now we have a guy that is doing this, that didn't even pay his own income taxes, until prompted to do so in order to get the job he now has. Does anyone else find this to be criminal? I blame Obama, it lies squarely on his shoulders, and I think it shows an arrogance that all of us should disdain. This deserves no respect, none.

http://en.wikipedia.org/wiki/Money_supply

Correct, Okie. That would be a dangerous situation, if only for the fact that it could have a trigger effect on other markets and businesses...

Cycloptichorn

okie, That's a pretty good start. I studied macro-economics in college and the effect of the money supply in our economy. I think there exists too many variables in the world economy to really understand the movement of money and its effect on our economy. We now have a situation where the supply of money seems to have disappeared along with the value of our assets.

I think economists will have to develop a new theory about money and the velocity of money, because there are so many countries in this world that uses the US dollar as their primary currency. I'm not even sure how foreign holdings of US dollars count towards M1 and M2.

It's a good thing that the government has provided the banks with money, because if customers all of a sudden took out their money from the banks, we'd have a real big problem on our hands. Banks wouldn't be able to meet the demand for cash even while they have restricted credit/cash to customers and businesses.

It's going to be a push and pull between keeping jobs and providing credit to working folks; no easy task in this environment.

Apparently Geithner was a total flop today, short on specifics, investors did not like the presentation. Geithner gives the impression the government is shooting in the dark, "trying things that have not been tried before," etc. Its a case of the blind leading the blind. FDR's programs did not work, so perhaps they should revisit that period of history to find that out before they try to copy FDR.

Mr. Tax Cheat, Geithner, has no business where hes at, he needs to go. Obama, where is your leadership? Get rid of an obviously bad choice, a dud, try somebody else.

Certainly, Geithner's proposals caused the Stock Market to dive nearly 400 points. The more I see of the Obama financial plans, the more I am reminded of the thirties under FDR when the government MASSIVELY spent and the businessmen withdrew their monies. It must be remembered that FDR did not get us out of the depression in the thirties; that there were still 15% unemployed in 1937 and that only World War II lifed the economy out of the doldrums.

There is no doubt that the US government will soon have to begin printing loads of money. This will cause runaway inflation. We may be getti ng into another Jimmy Carter era where we have high inflation and high unemployment.

I would like someone to explain the point of incentivizing the transfer of the toxic debt off of bank balance sheets. when you have a toxic substance moving it is of little long term value, what needs to be done is to neutralize it. Why not unwind all of the mortgage backed securities by giving each owners a percentage of the underlying debt, since the derivative is now dissolved so then are the credit default swaps connected to them, and then each mortgage can be looked at a valued on its own merits so the owners will be able to tell what it is they own. It this way most of the uncertainty is removed, the markets will again be able to assign values to worth, and the owners and potential buys will again be able to meet in the marketplace and do deals. The bonus is that we will know who is liquid and who is not, and we can flush out the failed firms through bankruptcy. The solid firms will have no trouble attracting business or capital.

this obama plan seems to throw a lot of money at the problem with no accomplishment other than to kick the can down the road hoping that later the problem will work itself out, it does not deal with the problem of debt that can not be valued by anyone.

I have not seen a number, but it appears to me to be around $500 billion in new money made by the federal reserve. Our foreign investors are going to have a hard time swallowing that...they may not be willing to go along.

Here is tghe estimate of the effectiveness of the stimulus package by the NOBEL PRIZE WINNER IN ECONOMICS FROM THE UNIVERSITY OF CHICAGO--GARY BECKER.


entry archive
January 18, 2009
Infrastructure in a Stimulus Package-Becker

Last week we blogged on how much stimulus to GDP and employment might be expected from a version of the Obama fiscal stimulus plan. I concluded that the amount of stimulus from the spending package would be far less than estimated in a study by the incoming Chairperson of the Council of Economic Advisers ("The Job Impact of the American Recovery and Reinvestment Plan", by Christina Romer and Jared Bernstein, January 9, 2009). The activities stimulated by the package to a large extent would draw labor and capital away from other productive activities. In addition, the government programs were unlikely to be as well planned as the displaced private uses of these resources.

The stimulus package's plans for spending on "infrastructure" clearly illustrate both concerns. I put this word in quotation marks because of the many definitions of what is included in the concept of infrastructure. Promoters of various stimulus packages- such as the just released House Committee on Appropriations $825 billion stimulus plan- include in infrastructure not only the traditional categories of roads, highways, harbors, and airports. They also include spending on broadband, school buildings, computers for school children, modern technologies, research and development, converter boxes for the transition to digital TV, phone service to rural areas, sewage treatment plants, computerized medical records and other health expenditures, and many other activities as well.

Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy. Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector. This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training. This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching.

An analysis by Forbes publications of where most jobs will be created singles out engineering, accounting, nursing, and information technology, along with construction managers, computer-aided drafting specialists, and project managers. Unemployment rates among most of these specialists are not high. The rebuilding of "crumbling roads, bridges, and schools" highlighted by in various speeches by President Obama is likely to make greater use of unemployed workers in the construction sector. However, such spending will be a small fraction of the total stimulus package, and it is not easy for workers who helped build residential housing to shift to building highways.

A second crucial issue relates not to the amount of new output and employment created by the stimulus, but to the efficiency of the government spending. Efficiency is not likely to be high partly because of the fundamental conflict between the goal of stimulating employment and output in order to reduce the severity of the recession, and the goal of concentrating infrastructure spending on projects that add a lot of value to the economy. Stimulating the economy when employment is falling requires rapid spending of this huge stimulus package, but it is impossible for either the private or public sectors to spend effectively a large amount in a short time period since good spending takes a lot of planning time.

Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect since infrastructure building projects in these areas can utilize some of the considerable unemployed resources there. However, many of these areas are also declining because they have been producing goods and services that are not in great demand, and will not be in demand in the future. Therefore, the overall value added by improving their roads and other infrastructure is likely to be a lot less than if the new infrastructure were located in growing areas that might have relatively little unemployment, but do have great demand for more roads, schools, and other types of long-term infrastructure.

Of course, at some point new taxes in some form have to be collected to pay for infrastructure and other stimulus spending. The sizable adverse effects on incentives of these taxes also have to be weighted against any value produced by the infrastructure (and other) stimulus spending.

The likelihood that such a rapid and large public spending program will be of low efficiency is compounded by political realities. Groups that have lots of political clout with Congress will get a disproportionate amount of the spending with only limited regard for the merits of the spending they advocate compared to alternative ways to spend the stimulus. The politically influential will also redefine various projects so that they can fall under the "infrastructure" rubric. A report called Ready to Go by the U.S. Conference of Mayors lists $73 billion worth of projects that they claim could be begun quickly. These projects include senior citizen centers, recreation facilities, and much other expenditure that are really private consumption items, many of dubious value, that the mayors call infrastructure spending.

Recessions would be a good time to increase infrastructure spending only if these projects can mainly utilize unemployed resources. This does not seem to be the case in most of the so-called infrastructure spending proposed under various stimulus plans

A healthy economy is all about the wise allocation of scarce resources to benefit the society the most. Since the government is the worst way of efficiently allocating scarce resources, because central planning is inefficient, government spending will only siphon away more and more of the wealth to be spent more inefficiently. Free markets have been shown to allocate scarce resources much more efficiently, through consumer demand from the bottom up, opposite of central planning. If Obama would read Thomas Sowell's Basic Economics book, he would learn this, and so would all the Democratic congressmen. Meanwhile, the people in charge head off into never never land on a false premise, that government can solve this problem by spending more money. Instead of running the country, they should all resign in disgrace and go back to school.

okie, If not the federal government to help our economy, who do you think is capable of helping our economy recover from this crisis?

The federal government isn't HELPING the economy.

They aren't fixing any problems. Their prolonging the problems and passing the buck to the next generations.

This 2.5 trillion in spending over the last 4 months has pretty much destroyed any chance of saving Social Security, Medicare, Medicade, and our health care problem.

Obama has succeeded in doing what republicans have tried to do for years. Social Security will be gone w/in 20 years, there will be NO money to fund it, AND we'll have reached the limit on our credit card.

That's not the question; if not the federal government, what organization (federal or private) will help our economy recover from this current cash crisis?