BANKRUPT BANKER
Credit crunches are not like other financial crashes--for example, those that occur from time to time in stock markets or on a commodity exchange. Credit permeates every area of the financial system and the real world of everyday business. It is impossible to operate without a bank account and lines of credit, no matter what the size of the organization. When credit dries up and trust in banking is withdrawn, no one can work normally, and that is why it is so important for government to step in and stabilize credit crunch situations early and decisively. For over a year now, lending between banks has virtually completely dried up and so the "wholesale" bank-to-bank market for cash that underpins all commercial banking, known as the "money markets" have frozen. In these situations, banks can only use funds and deposits available from the central bank in their country or taken from their individual retail or commercial depositors and investors. So, central banks, mainly the Federal Reserve of the U.S., the Bank of England, Bank of Japan and the European Central Bank, have been actively providing money for the wholesale money markets in the past year by pumping funds from their countries' treasuries into the system.
Unfortunately, this solution simply hasn't been enough, and so in the first week of September 2008 we began to see the complete failure of wholesale banking, manifested in U.S. investment banks simply running out of money. Having no retail depositors (the definition of investment banks), there was now not enough money in the central banking system to keep them going. One after another, they needed to be rescued. Bear Stearns (in March 2008) and Merrill Lynch found new owners; Goldman Sachs and Morgan Stanley need to be completely restructured and re-financed as commercial banks. I can imagine the surprise of many investors to see the headline in The Wall Street Journal that these two investment "banks" were to become real banks. (4) Lehman Bothers was allowed to fail when no commercial bank buyer could be found.Other U.S. wholesale financial institutions like Fannie Mae, Freddie Mac and Indy Mac, which depend on the money markets for short term funding, also failed and needed to be rescued by funds pumped into them by the U.S. taxpayer.In the U.S., the financial institutions are now waiting for yet another and much more public rescue plan of US$ 700 billion of funds to be pumped into the system I signed into law on 4 October 2008]. Quite rightly, taxpayers are shocked at the amounts of money required to keep the wholesale money market going and are unhappy about this type of rescue. The problem is that it is not just the so-called "fat cats" of investment banking that are being rescued; it is every aspect of business life that needs to be supported. A measure of this is the dire warnings about the problems of the U.S. commercial paper market drying up. The problems in this market are not the headline news. Commercial paper lines of credit are short term loans that are the way that U.S. business keeps going on a practical day to day basis and companies pay their invoices and wages. Among the articles in the financial press are some detailing the shrinkage of this market to the lowest levels known in the last seven years, and that is not good news for the real economy.
