I don't think most people don't understand what caused the panic, and I see a tendency to confuse the types of lending we are talking about.
The crisis wasn't happening in ordinary lending, like when a small business borrows a million to build a new building. It stopped that kind of lending, becaus eof the fear, but that was a symptom, a consequence, that wasn't where the problem was happening.
The bankers
broke the buck. And this scared them so much they froze.
It started with short term lending and money markets, in
shadow banking. This is banking that we ordinary people never really see or participate in, overnight loans between banks and to the largest corporations abd the very rich.
Quote:
Events
On Monday, September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. On Tuesday, September 16, 2008, Reserve Primary Fund, the oldest money fund, broke the buck when its shares fell to 97 cents after writing off debt issued by Lehman Brothers.[8]
The resulting investor anxiety almost caused a run on money funds, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions: through Wednesday, September 17, 2008, prime institutional funds saw substantial redemptions.[9][10] Retail funds saw net inflows of $4 billion, for a net capital outflow from all funds of $169 billion to $3.4 trillion (5%).[9]
In response, on Friday, September 19, 2008, the U.S. Department of the Treasury announced an optional program to "insure the holdings of any publicly offered eligible money market mutual fund—both retail and institutional—that pays a fee to participate in the program". The insurance will guarantee that if a covered fund breaks the buck, it will be restored to $1 NAV.[10][11] This program is similar to the FDIC, in that it insures deposit-like holdings and seeks to prevent runs on the bank.[7][12] The guarantee is backed by assets of the Treasury Department's Exchange Stabilization Fund, up to a maximum of $50 billion. It is very important to realize that this program only covers assets invested in funds before September 19, 2008 and those who sold equities, for example, during the recent market crash and parked their assets in money funds, are at risk. The program immediately stabilized the system and stanched the outflows, but drew criticism from banking organizations, including the Independent Community Bankers of America and American Bankers Association, who expected funds to drain out of bank deposits and into newly insured money funds, as these latter would combine higher yields with insurance.[7][12]
[edit] Analysis
The crisis almost developed into a run on the shadow banking system: the redemptions caused a drop in demand for commercial paper,[7] preventing companies from rolling over their short-term debt, potentially causing an acute liquidity crisis: if companies cannot issue new debt to repay maturing debt, and do not have cash on hand to pay it back, they will default on their obligations, and may have to file for bankruptcy. Thus there was concern that the run could cause extensive bankruptcies, a debt deflation spiral, and serious damage to the real economy, as in the Great Depression.[citation needed]
The drop in demand resulted in a "buyers strike", as money funds could not (because of redemptions) or would not (because of fear of redemptions) buy commercial paper, driving yields up dramatically: from around 2% the previous week to 8%,[7] and funds put their money in Treasuries, driving their yields close to 0%.
This is a bank run in the sense that there is a mismatch in maturities, and thus a money fund is a "virtual bank": the assets of money funds, while short term, nonetheless typically have maturities of several months, while investors can request redemption at any time, without waiting for obligations to come due. Thus if there is a sudden demand for redemptions, the assets may be liquidated in a fire sale, depressing their sale price.
An earlier crisis occurred in 2007–2008, where the demand for asset-backed commercial paper dropped, causing the collapse of some structured investment vehicles.
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The thing that so many republicans and democrats have a hard time facing is this - the very first instant that the shadow bankers were in trouble, our government socialistically bailed them out.
Leading us to that muost american of paradoxes - socialism for the very rich and the corporations, rugged individualism for everybody else.
This is the moral, ethical, and political dilemma that we are all really talking about.
Socialism for the rich. Government protection for the rich. Government forgiveness and compensation for crimes and mismanagement by the rich.