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LEHMAN AND THE BAILOUT….Was last week’s financial crisis caused by the Fed’s decision to allow Lehman Brothers to go into bankruptcy? I’m not sure, but here’s the basic argument in favor of this scenario:

  1. Monday: Fed allows Lehman to go bankrupt.

  2. Tuesday: Reserve Prime, a money market fund with exposure to Lehman securities, announces that it has “broken the buck.” Money market funds are supposed to be the safest places possible to park your cash outside of T-bills, so this causes a panic.

  3. Wednesday: Depositers start making large-scale withdrawals from other money market funds. Banks need to service these withdrawals, so they begin hoarding cash and calling in their short-term loans (excess reserves held by banks increased last week from a normal $2 billion to nearly $200 billion). Every bank is doing the same thing, so no money is available for normal interbank loans. LIBOR skyrockets.

  4. Later Wednesday: with everyone hoarding cash, the credit markets seize up completely. The commercial paper market, which funds actual operations of actual companies, is close to death. The entire financial system is near collapse.

  5. Thursday: Bernanke and Paulson announce their bailout plan. This reduces the panic that banks will go bust and thereby frees up the credit markets a bit.

More details here. If I understand everything correctly, Bernanke and Paulson basically took a look at what happened after they allowed Lehman to collapse and decided it couldn’t happen again. Hence the bailout.

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is the first thing despots go after. An unwavering commitment to it is probably what draws you to Mother Jones' journalism. And as we're seeing in the US and the world around, authoritarians seek to poison the discourse and the way we relate to each other because they can't stand people coming together around a shared sense of the truth—it's a huge threat to them.

Which is also a pretty great way to describe Mother Jones' mission: People coming together around the truth to hold power accountable.

And right now, we need to raise about $400,000 from our online readers over the next two months to hit our annual goal and make good on that mission. Read more about the information war we find ourselves in and how people-powered, independent reporting can and must rise to the challenge—and please support our team's truth-telling journalism with a donation if you can right now.

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