Welcome to the past
We have a savior. His name is Warren Buffett. Of course, we have been through this before. Only back then, our savior was named JP Morgan.
It’s called the Panic of 1907. Wikipedia describes it this way:
The Panic of 1907, also known as the 1907 Bankers’ Panic, was a financial crisis which occured in the United States when the stock market fell close to 50% from its peak in the previous year. At the time the economy was in recession and there were numerous runs on banks and trust companies. The panic’s primary cause was a retraction of loans by a number of banks in New York City, and the sentiment quickly spread across the nation leading to the closures of both state and local banks and businesses. The 1907 panic was the fourth experienced in the States in 34 years.The crisis was ignited by an attempt to corner the market in a copper company that had collapsed that October. When the bid failed, banks that had loaned money for the scheme experienced a number of runs which eventually spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company, New York’s third largest trust company. From Knickerbocker, fear spread throughout the city’s trusts and across the country as regional banks pulled deposits from New York, and as nationwide people withdrew deposits from their regional banks.
Well, there was no attempt to corner the copper market, but the root cause was not the attempt to corner the market – that just gave the cause a reason to move forward. The cause was bad loans. Loans financed in the hope of copper rising to incredible prices.
What’s the cause of our current ills? Bad loans. Loans financed in the hope of real estate rising to incredible prices.
In a reprise of his role during the second Cleveland administration when the gold standard was under assault, J.P. Morgan acted to restore order. He summoned the leading bankers and financial experts to his home where they set up shop in his library. Over the course of the next three weeks, Morgan and his associates labored to channel money from the strong institutions to the weaker ones in an effort to keep them afloat.
Buffett’s Berkshire Hathaway Inc. said Tuesday it was investing at least $5 billion in Goldman — a move Wall Street took as sign of support for the independent investment bank model. Besides buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman’s common stock.
The hastily prepared Aldrich-Vreeland measure provided short-term aid to ease the ongoing credit crunch. The legislation allowed national banks to issue notes on a wider range of securities than previously allowed. The effect of that liberalization of policy was to put more money into circulation.
The rescue plan would give Washington broad authority to purchase bad mortgage-related assets from U.S. financial institutions for the next two years. It does not specify which institutions qualify or what, if anything, the government would get in return for the unprecedented infusion.
For long-term health, the government created the Federal Reserve to ensure “financial elasticity”. Now the government is proposing the creation of some new agency that will ensure elasticity in the mortgage markets.
Here’s the thing – if the federal government had acted to save millions of individuals from losing their homes, the mortgage brokers never would have gotten into dire straits. The crisis never would have happened. Anyone with one eye on the market and one brain cell to spare could have seen it coming. Ideology, however, tends to trump common sense all too often.
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