Economic collapse? Martial law?

On CSPAN, congressman Paul Kanjorski of PA dropped a bombshell, and now everyone on the internet -- on the right, on the left, and in-between -- is talking about it. After being rattled by an emotional call from a viewer, Kanjorski disclosed something that he probably did not intend to disclose. He said that in the middle of last September, the U.S. economy came close to utter ruination. "Close" as in hours away.

Why? Because there was an electronic run on the banks -- or so the congressman says:

On Thursday, at about 11 o'clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two.

The Treasury opened up its window to help. They pumped $105 billion into 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 and there. And that's what actually happened.

If they had not done that their estimation was that by two o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

At Portfolio.com, Felix Salmon offers these caveats:

The problem is that none of this has been reported anywhere else, and I for one can't remember any reports of money-market funds being closed down or Treasury suspending withdrawals. Kanjorski is talking anecdotally in the context of a C-Span phone-in, and even Kedrosky [another writer] describes him as "semi-coherent".

Well, the congressman seemed coherent enough to me. Emotional, yes; rattled, yes. But coherent. It's impossible to believe that any politician would simply concoct an event of that sort (what would he have to gain?), although it is easy to understand why many pols would prefer not to discuss such things in public.

Even so, I counsel caution before accepting or rejecting this report at face value. Over on this site, a reader named Rick asks some common-sense questions:

Does this make sense to you? Because it sure doesn't sound plausible to me. 550 billion in 1-2 hours doesn't sound like a rate to hit 5.5 trillion 3 hours later. How did Bernanke freeze the accounts? He stopped any and all withdrawals from money market funds? What is his authority to do that? Can he therefore limit anyone's access to their money? Can he unilaterally stop anyone from withdrawing money from any account anywhere anytime? Are money market accounts even protected under FDIC? How did raising the FDIC limit 'restore confidence'? I seem to remember there only being about 2.4 trillion in accounts that was not insured under the 100 thousand limit. Every one of those depositors somehow got the memo to yank their funds at the same time and no one else got a copy? And the uninsured funds were doubling in number? Is it credible that 550 billion of FDIC insured accounts was withdrawn in 1-2 hours? Were records and proof of this 'run' presented to Congress or was it merely more of the WMD-style proof?

I think we are left with two options:

1. Congressfolk were targeted by a major deception operation designed to instill a sense of panic and urgency -- weeks before the financial crisis of early October. (It is important to be clear on the chronology.)

2. The shit really did hit the fan in mid-September and the Fed was able to pull off an incredible magic trick.

Either possibility is very troubling. I can't think of a comforting third option.

A few facts favor the second scenario: Lehman Brothers went Chapter 11 on September 15. Merill Lynch, facing the same challenge, agreed to be purchased by Bank of America. A massive money market fund, the Reserve Primary Fund, admitted to its customers that they would lose money on every dollar invested. All of this was common knowledge: Only the near-instantaneous $550 billion draw-down was not.

The Reserve Primary Fund -- driven into the ground by its investments in financial instruments backed by crap -- may have broken the "dollar barrier," but that fund alone cannot account for the figure of $550 billion. The fund held only $62.6 billion in assets. The problem was systemic.

Still, just how does one stop investors from withdrawing their money, as Kanjorski claims?

Are we talking about small investors -- people like you and me -- or did a cabal of major players make a concerted effort to destroy the American economy by instituting a run? (The more paranoid commentators favor the latter scenario, although no-one has yet fingered a specific bad guy.)

On October 10, a similar "secret run" on the banks in Britain placed the U.K. in a similarly parlous position.

Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.

City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.

The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.

Only frantic behind-the-scenes efforts averted financial meltdown.

The U.K. event tends to verify the Kanjorski bombshell.

Perhaps we should see these events in the light of this revelation by representative Brad Sherman of California, who describes the pressures put on congressfolk to pass last year's economic emergency bill. Our representatives were told that martial law might be imposed...


Scare rhetoric? Or a glimpse of the future?

On what I hope is an unrelated note: A lot of people -- and not just the aluminum chapeau crowd -- have worried about the stateside maneuvers of the 3rd Infantry Division’s 1st Brigade Combat Team. Despite Constitutional prohibitions, they are training for possible deployment in civilian situations.

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities.

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

Civil unrest? Crowd control? What makes those problems so immediate?

The Army Times story at the other end of the preceding link was published on September 30, 2008. Note the date: The training for civil unrest was underway just two weeks after the reported near-meltdown of the national economy.

One might also note that the McCain campaign pretty much stopped trying at that point. As I mentioned earlier, the chronology is important.