Here is some underreported insight that supports the theme of “Money as a Weapon System” which should give you a moment of pause.
LiveLeak reports this interview of Rep. Paul Kanjorski. At 2 minutes and 20 seconds in the video below, Kanjorski explains how the Federal Reserve told Congress members about a “tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars.” According to Kanjorski, this electronic transfer occurred over the period of an hour or two. And it gets worse. Kanjorski paraphrases the following disclosure by Bernanke and Paulson: (emphasis added):
On Thursday (Sept 18), [2008]at 11 in the morning 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 was 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…
We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.
To consider:
1. Was this on the order of magnitude of the Bay of Pigs in terms of potential?
2. Where does this situation (connectivity and propagation characteristics of the global economic digital network) rate on the list of Top Threats in the National Security Strategy?
3. Is the Secretary of the Treasury the main effort for interagency?
4. Would you rather have a great Secretary of the Treasury or a great Secretary of Defense?
5. Could this enormous withdrawal have occurred without planning? or is it a property of densely connected networks that go beyond planning and control? ([Hint: if you answer no, you have some work to do]
A friend replied:
I saw this interview last week. My father is a President of a bank, so I often turn to him for his opinion and perception on the financial markets.
I’d like to tackle your comments one at a time.
1. Was this on the order of magnitude of the Bay of Pigs in terms of potential?
I think the situation was very dangerous, but the solution that was applied was nothing more than a pressure bandage on a single wound. Our country is over $10T in debt. The money that was released by the Federal Reserve is money that is borrowed from other countries – mainly China and the Gulf States. Shutting down the markets was the only thing they could do, but it did not address the core issue – we have too much debt.
Would the country have been crippled if the run on the banks continued? Absolutely. Again, I do not think that the measures applied since SEP 09 have done much to solve the economic problems of this country.
2. Where does this situation (connectivity and propagation characteristics of the global economic digital network) rate on the list of Top Threats in the National Security Strategy?
In my opinion, in the top three, quite possibly number one. The US economic system is built on some very shaky ground. For the first time in US history, there are more governmental jobs than jobs in the manufacturing sector. We have become a service based economy. Due to the overconsumption of our government and our people, we have a national debt of $10T and it’s growing to even larger extremes.
The amount of foreign investment in this country is massive. The Arabs – mainly from the Gulf States and Saudi Arabia – have quietly poured hundreds of billions if not trillions into the US economy since the 1970’s. The Chinese own hundreds of billions if not trillions of US Treasury bonds. One of many countries could have been behind the sudden withdrawal of funds – setting an example that the US financial system was collapsing.
The connectivity associated with the 24 hour global financial market has become too vast and too complex to manage. Add in some horrific if not illegal financial practices – the Madoff Ponzi scheme, the use of derivitives, and credit default options – and the system cannot be sustained. If the bottom of the pyramid is built of mud, and it starts raining, what happens with the top of the pyramid.
3. Is the Secretary of the Treasury the main effort for interagency?
No. Interagency operations should have no permanent lead. They should task organized as appropriate. I also am confused by the question – main effort for what?
4. Would you rather have a great Secretary of the Treasury or a great Secretary of Defense?
Since we are a capitalist country, in theory at least, a great Secretary of the Treasury is mandatory. All other governmental functions are reliant on a stable economy at the least, and a growing economy is desired. The Department of Defense is reliant on taxpayer funds, which are derived from the state of the American economy. Going back to my thoughts on debt, it is possible to cut governmental functions to save money and lower taxes for the American citizen.
Without a strong American economy, you cannot have a strong military. Look to the Great Depression and the state of the Army from 1929-1937 for an example when our country has a weak economy…a weak military is sure to follow.
5. Could this enormous withdrawal have occurred without planning? or is it a property of densely connected networks that go beyond planning and control?
I tend to believe it’s more related to your second question than you first. It is possible that this was a planned effort to send a message to the US. The Chinese would probably do something like this because of the massive amount of T-bills they hold – we’ve reduced rates on them to literally zero on the short term bills.
But I think human psychology has a huge part to play in this. If I recall correctly, this was around the time when Lehman Bros. was allowed to fail, and no one realized how interconnected they were into the mortgage markets. When the government allowed them to fail, it sent a message to many people in the world that there was a significant problem with the US economy and the financial sector. I think it led to some wise financial gurus saying “I have to get some of my assets out of the financial sector and banks before it is too late.” After you reach a certain point, you then hit a level of panic. It would be instructive to see an hour by hour breakdown of the $550B worth of withdrawals to see if the snowball was gaining momentum. I think this would confirm my belief that people were starting to get real scared about the viability of the market.
And as we’ve all seen, the following weeks saw more giants of the American economy begin to falter. AIG, Chrysler, Ford, and GM – not to mention other financial firms like Merrill Lynch and banks such as Bank of America and Citibank – have all had major problems with solvency.
I’d like to conclude this entry with something too many people within our military have forgotten:
Al-Qaeda leader Osama bin Laden said he is trying to bankrupt the U.S. through its war on terror, a strategy he says felled the Soviet Union two decades ago in Afghanistan, according to a translation by al-Jazeera television of his full, videotaped statement.
““The mujahedeen recently forced Bush to resort to emergency funds to continue the fight in Afghanistan and Iraq, which is evidence of the success of the bleed-until-bankruptcy plan — with Allah’s permission,” bin Laden said in the video that aired on the Qatar-based satellite network, according to the translation, posted today to al-Jazeera’s Web site. The channel aired portions of the statement on Oct. 29.”
I agree with you that we have just seen the first steps of trying to stabilize the patient with respect to maintaining orderly markets. Miles to go before we get to long-term treatment considerations, and the development of healthy lifestyle issues in our financial markets. At some point we have stop the tactic of borrowing to get out of debt, and rebuild the capital base through savings and production, rather than soliciting the capital of others exclusively.
I also concur on the magnitude and potential consequences of financial meltdown. The interconnectivity and subsequent fragility of global markets seems to have caught everyone by surprise; a classic case of a complex adaptive system that cannot be understood and controlled, but perhaps managed within boundaries; what Dr Paparone (and others) have described as “messy management”
Acknowledging I am a naïve child in this area, it seems to me that the challenge to interagency effectiveness is our departmental structure which can be seen as an attempt to bound all problems within formal domains, giving authority and responsibility (unity of command) to a single department for typical problem sets. We don’t habitually try to “matrix manage” governmental problems; rather we try to stay in our lanes. When problems spill over boundaries we wander around like “ducks that have been hit on the head”, and we have no routine “current ops” shop that is designed to coordinate and integrate. The problem seems to be that every such problem will always be a task organization challenge as some lead agency tries to pull a team together. With respect to nation building it seems like DoD, the most resourced, has been trying to take the lead to force IA. In Homeland defense areas I can see other dynamics in play.
Departmental bureaucracies, by their nature, seem ill-suited for routine IA. Where is the government’s “G3”? Is it the White House? You see more “coordinators” there and staff synchronizers than you do true Opns: I am thinking about the national Security Advisor and the War Czar particularly. A policitical consideration is that the White House gets a some plausible deniability (survival insurance) by having expendable department heads in charge of wicked problems as opposed to trying to direct traffic themselves.
I also concur with the idea of the primacy of the economic dimension in terms of importance of national power (I am doing a lot of concurring here 😀 )
I think the better explanation of sudden massive withdrawal s is power of complexity theory and the butterfly effect to magnify feedback in complex adaptive systems as opposed to deliberate planning. The financial markets are wired for the free and full expression of human psychology to be manifest . Momentum ends up having a power all of its own, like an avalanche effect. John Maudlin, of Frontline Thoughts” has a worldwide readership of over a million, has done a good job of summarizing this vulnerability through complexity and connectivity in global markets over the last couple years. Your dad is probably familiar with him 😀