This is a little late, but we just passed the one-year anniversary of the pinnacle of the financial crisis: the Lehman failure.  This milestone prompted an excellent article in The New Yorker by James B. Stewart, titled “Eight Days.” It is an extremely well-sourced, inside look at the day-to-day activities during the collapse of Lehman Brothers Holdings, Inc.

I came away from it with not so much a revelation, but more of a confirmation of something I had thought several times before.  A thought that was wildly unpopular during this time frame: Thank god for Henry Merritt Paulson, Jr. and Ben Shalom Bernanke.

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It’s important to keep a level of perspective when we talk about the bank bailout and stimulus package.  This isn’t your average, run-of-the-mill recession.  This is an on-the-brink-of-disaster type of recession, and the reason it hasn’t tipped into full blown depression yet is because we’ve made some pretty quick moves to respond to various crises.

One of which was the money-market crisis.  Rep. Paul Kanjorski touches on it here:

Basically, what happened is there are these money-market funds, which are mutual funds of various short-term debt instruments, which include commercial paper, etc.  This means that a bunch of high-grade, short-term debt gets bought up, a bunch of people go in on it, and everyone gets a small but consistent return.  Typically, a money-market fund shoots for a value of $1.00 (net asset value).  They should never go below $1, called “breaking the buck”, because this means that the fund is losing money.

Well, here’s what happened the week of September 15th:

Monday: Lehman Brothers collapses.

Tuesday: Two money market funds “break the buck” after writing down the debt they were carrying for Lehman Brothers.

Wednesday: Money starts to fly out of money-market funds as investors panic, causing a virtual run on the shadow banking system.

Friday: The government steps in and guarantees money-market funds (FDIC-style) which calms the market.

The reason why a run on money-market funds is so crippling is because they basically act as the aggregate demand for short-term debt.  If no one is buying money-market funds, then the demand for commercial paper drops, and corporations and businesses can no longer get short-term debt, which causes an acute liquidity crisis.  This would effectively shutdown the entire economy.  It would be a return to the 18th century.  That’s why this isn’t an overstatement from Rep. Kanjorski:

If they had not done that, their estimation is 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.

There’s some serious shit going on here, so let’s try to keep that in mind.