Banking Chaos and Panic By People
They say history repeats itself, but usually not this quick. The United States is in going through a huge banking collapse not seen since the banking collapse that gave rise to the Great Depression.
In 1929, the good times in the United States came to an end. After years of tremendous personal financial wealth gains, the market corrected. This resulted in rumors of banking problems and a run on the banks that resulted in the collapse of the industry.
To say the change in fortunes was dramatic would be a minor understatement. We went from a period of great wealth to poverty for many. Even worse, it lasted for ten years from coast to coast.
It took two major events to put a stop to the economic misery. Social projects by the government created jobs for tens of millions and then World War II started. War requires goods and the war acted as the ultimate economic stimulus package.
Does all this sound a little familiar? It should. The only difference is the Great Depression was fueled by stock market gains, while we have seen housing market gains. We all hope, of course, that a World War is not necessary as well.
Lehman Brothers in bankruptcy. AIG, Freddie Mac and Fannie Mae saved by the government. Merrill Lynch going for a song to Bank of America. Washington Mutual nearly failing. Is there any doubt the banking industry is a nightmare.
Many have put faith in the fact only Lehmans actually went bankrupt. Well, this is a mistake. The others were only saved from bankruptcy by the government or a company, Bank of America, getting a great deal.
So, why are we not in the second Great Depression given all the bad news? Well, we may end up there, but so far we are being saved by Ben Bernanke and the Federal Reserve. Mr. Bernanke should get the highest award possible if we survive this mess.
In 1929, the Federal Reserve was neither particularly strong nor prepared for the massive rush on banks. To the extent that is was involved in the banking process, it failed in its role. Well, not this time.
When banks need financing, they look to the Federal Reserve. It is the bank of last resort and keeps the market liquid. When things go bad like at the moment, it prevents the collapse of the economic structure by putting money in the system.
The Fed has become very savvy. It has started stepping in and taking over banks. To prevent panic, it arranges for a buyer of the bank by guaranteeing the transaction. It then does the transaction over the weekend when there is less focus on the news.
Unfortunately, the Federal Reserve can only do so much. All indications are we are in the early stages of the banking collapse. The Fed will try to get us through it, but there is much still to be determined.
Filed under: Business