Thursday, June 21, 2007

The Panic of '07

The news coming out of New York is that a large investment house lent their name to two hedge funds that now find themselves in trouble with losses from the subprime mortgage market derivatives. Merril Lynch (one of the creditors) is looking for blood, and Blackstone is trying to broker a peace deal between the two (at least long enough to float their IPO on the unsuspecting public)

Back to the Future

The Panic of '07, a financial crisis in the US, would also become known as the "Bankers' Panic".

In March '07, over-expansion and poor speculation led to a small crash. Money became extremely tight. A second crash occurred in October '07. The market falls nearly 50% from its '06 prices, the economy is in recession, and there are numerous runs on banks and financial institutions.

The primary cause of the crash is attributed to a retraction of easy credit terms...starting in New York with some big banks and quickly spreading across the country leading to bank and business closures.

To bring relief to the situation, the US Secretary of the Treasury earmarked Federal money to quell the storm. Complete ruin of the national economy was averted when powerful banking interests step in to meet the crisis, redirecting money between banks, securing international lines of credit, and propping up prices by buying the securities of selected institutuions.

However, this assistance doesn't come without a cost. The banking interests use their additional political influence to push a bill through congress which just failed one year prior to the panic. The new bill creates a public private partnership and institution for averting excesses in credit creation and backing financial institutions for the stated purpose of advancing stability and ensuring that a panic like '07 is never replayed.

Notice anything funny about this "prediction"?

Actually everything under the heading "back to the future" is actually about 1907...rather than 2007.

The US Congress passed the Aldrich-Vreeland Act which established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking. In 1913, the commission recommended the adoption of the Federal Reserve Act, which mandated the creation of a central banking system to dampen the effects of future panics.

Yeah....uh...ever heard of the Great Depression or the "law of unintended consequences"?

Ciao for now,

1 comment:

Steven said...


I love that fact you talk about stuff like this!

I'm not at all sure a financial meltdown is a done deal...hard to say. Whatever the case, a good mind, right or wrong in the prediction, is always needed.