About That Bank Run Excuse For Bailouts...

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By John Titus, Creator of Bailout

Recently, while researching historical causes of bank failures, we came across a scholarly economics paper that proves the justifications for bailouts, and those for TARP in particular, are an even bigger crock of shit than the most hardened cynics ever imagined, and that the top people behind the mainstream bailout propaganda campaign knew their justifications were false at the time.

Back then, skeptics (this website included) attacked the bailouts on many grounds. For one thing, the mainstream equation of bank failures with the failure of the entire financial system was never supported by any evidence; it was announced rather than explained. For another, the TARP narrative suffered from internal inconsistencies; Hank Paulson, for instance, said that TARP cash would only be distributed to healthy banks, but never explained how a bank run could threaten supposedly robust institutions.

We could go on, but the gist is this: the mainstream bailout story didn't add up.

Nevertheless the bailout skeptics, especially those (like William Black and James Galbraith) who said that fraud (not bank runs) was the root cause of market turmoil, were dismissed by mainstream voices like then Treasury Secretary Hank Paulson and CNBC's Jim Cramer as rubes who lacked the sophistication to foresee the devastating global effects that the bank runs supposedly then underway would cause.

And for some reason, the claims of an epic bank run--and its effects--kept getting bigger and bigger after the pro-bailout crowd prevailed in its fear-based propaganda campaign.

TARP passed on October 3, 2008. And yet more than three months later, there was Paul Kanjorski on C-SPAN regaling his extremely pissed off audience -- after Obama was inaugurated -- with tales of how a $550 billion bank run over the course of a few hours in September 2008 would have destroyed not only the banks themselves, but "our economic system and our political system as we know it."

Even if Kanjorski's incredible premise were true (it isn't), his argument still suffered from the same flaw as every other TARP-driven claim: there was never any proof that the alleged bank run would have taken down the financial system. No one ever offered a single historical example of a bank run destroying so much as a single bank.

The "run" that Kanjorski spoke of, for instance, bears scarcely any relation at all to the actual facts: (1) it wasn't a run because it involved redemptions across an entire industry, (2) those redemptions totaled $145 billion over a week, not $550 billion in a few hours, (3) it caused only one fund (the Reserve Primary Fund) to fail, which wasn't even a bank in the first place, and (4) it was stopped in its tracks by a $50 billion Treasury guarantee weeks before TARP passed.

By way of that recent history, we invite readers to examine the scholarly economics paper that annihilates not only this entire canon of TARP mythology, but with it any pretense that its peddlers weren't fully aware that (a) the real culprit during financial panics is fraud and (b) bank-runs were known to be fictitious rather than real threats to banks during those panics.

In “The Origins of Banking Panics: Models, Facts, and Bank Regulation,” authors Charles W. Calomiris and Gary Gorton, relying on the U.S. Comptroller of the Currency's Annual Report for 1920, examine the many reasons for bank failures during the financial panics of 1873, 1884, 1890, 1893, 1896 and 1907. Here is what they say:

Of the 116 bank failures that occurred during intervals surrounding panics, 101 were attributed to asset depreciation, with eleven of these cases mainly involving real estate-related investments (all from 1884 to 1896). Thirty of these 101 failures involved fraudulent activities. An additional fourteen failures were attributed solely to fraud. The single remaining failure was attributed to a bank run (in 1907). These data clearly indicate that bank failures during panics often involved shady activities by bankers (44 out of 116 cases), which typically made banks' assets especially vulnerable to bad news (hence the association between asset depreciation and fraud in most of the fraud cases). The fact that bank failure is linked to asset depreciation does not itself contradict the withdrawal risk approach, since advocates of this view argue that panics themselves caused asset depreciation of banks. In 25 cases, asset depreciation was deemed the result of high market interest rates during the panics. Nevertheless, in the overwhelming majority of cases (91 of the 116), failure was not attributed to panic-induced stringency in the money market. Furthermore, the fact that the Comptroller only attributed one failure to a bank run per se shows that the direct link between bank runs and bank failures during panics was not important.

Financial Markets and Financial Crises (Nat’l Bureau Econ. Research, 1991), chapter 4, at p. 154 (emphasis added).

There we see, in black and white, what is pretty much a final tally in the intellectual battle by wholly ignored TARP skeptics against their mainstream bailout apologist opposites: FRAUD 44 BANK RUNS 1. To translate that blowout into a box score that every ex-football player Treasury Secretary will appreciate:

WILLIAM BLACK FRAUDSTERS.... 132

HANK PAULSON BANK RUNNERS... 3

And that just shows how infrequently bank runs cause individual banks to fail--1 time out of 116. Remember, bailout proponents were trying to convince everyone that bank runs would cause the failure of the entire financial system. Bill Black's team was playing with a major handicap. But the larger point here, which supports today's skeptics and debunks mainstream bailout apologists, is that the real killer of banks is fraud (not bank runs).

What is more, Ben Bernanke knew all of this. The Federal Reserve Chairman knew that fraud caused bank failures, not bank runs, because he not only reviewed, but commented on, this very same paper on bank panics. On the first page of the paper, in fact, the authors expressly thank Bernanke for providing his "comments and suggestions." (p. 109)

For visual learners, Bernanke's full knowledge that fraud (not bank runs) caused the implosion is on full display in his reaction (exactly at 7:12) to Alan Greenspan's surprise emission of this statement: "There was rampant fraud in a lot of what was going on in these markets... Things were being done which were certainly illegal and clearly criminal in certain cases."

And that, sports fans, explains where the wild fear in everyone’s eyes was really coming from in the Fall of 2008: it wasn’t from any bank run, it was from that most forbidden of F-words on CNBC, F-R-A-U-D. Bank runs were nothing but a boogey man deployed by Bernanke and Paulson and Geithner and the gang to scare people into going along with TARP. Bank runs conjure up stark images of blood-drenched gunfights at ATM machines. The truth is borne out in the empirical data above: fraud causes bank failures.

Just in case you were wondering, the paper's authors also reviewed the vast literature on the role of bank runs during the Great Depression, when a great many banks failed, and brush them off in one very telling observation:

From the standpoint of this literature,the Great Depression tells one less about the inherent instability of the banking system than about the extent to which unwise government policies can destroy banks. For this reason we restrict attention to pre-Federal Reserve episodes. (p. 115)

All of that said, the impetus for the bailout bonanza of 2008 is now crystal clear. How many of today's officious financial tinkerers, when you think about it, had ever seen an actual bank run take place in the U.S.? Not one of them. Moreover, it is the tinkerers themselves who are the root cause of bank failures far more often than the mythical bank runs they hide behind.

No, what really put the fear of Jesus into Bernanke & Co. wasn't the bank runs that they hadn't seen, it was what they had seen, firsthand: the filthy criminal factory of fraud inside of every mega-bank, which had started coming apart at the seams (the way Ponzi schemes do) in September 2008.

Far from saving the financial system as advertised, the bailouts performed a much different function: they papered over, in the lush green of banker bonuses, the rampant fraud that caused the crisis in the first place. Consequently, Wall Street's freight train of fraud, punctuated by the herring-red caboose of cartoon bank runs, is still chugging away to this day, furiously burning cash stolen from everyone else, on a direct collision course with the next, even more spectacular financial meltdown…

Speaking of meltdowns and fraud, you’ll never guess who edited the now-out-of-print book in which this scholarly paper appears as a chapter. Why, it’s…. (cue Scooby Doo villain music) Mr. Hubbard!!! Yes, that Glenn Hubbard signed off on the entire dang meddling textbook way back in 1991 and was, like Bernanke, thanked for his comments on the bank panic paper. We wonder how much he was paid? We'll take unlimited betting action that it was less than $20, which is how much Professor Hubbard rakes in each minute as an expert witness for fraud factories like Countrywide.

Yves Smith speculates that Hubbard might be whistling a different tune about LBO firms these days than he did in the early 1990s “because he’s since joined the boards of KKR and Ripplewood Holdings (which BTW you don't find on his official CV)." The same persuasive cash dynamic is undoubtedly at work when it comes to Hubbard's views of bank fraud perpetrated by fraudulent institutions like Countrywide and their fraudulent $500 million CEOs.

You see, way back in the early 1990s, perpetrators of massive frauds went to jail, economics professors wrote research papers instead of ad copy for their fraudulent clients, and at least one or two government officials actually cared about people and principles instead of selling their souls to the highest criminal bidder.

People and principles are the butt of jokes by today's elites. The next fraud driven collapse will be horrifying, you may rest assured, but at least it's going to wipe the smiles right off their arrogant fucking faces--and sooner than they think.

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John Titus has practiced patent law in federal courts for nearly 20 years.

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NOW WATCH THIS

KANJORSKI'S IMAGINARY BANK RUN

DB HERE

In the above video starting at the 2:20 mark, Paul Kanjorski details a chilling scenario communicated to select members of Congress during emergency discussions with Treasury and Fed officials on Thursday September 18th. Listen while Kanjorski relates the fear about an electronic run on the banks that was part of the fear-mongering program employed by Paulson and fellow henchmen. You will notice that he says members were told that within 24 hours, the entire political structure of the United States would collapse.

C-SPAN TRANSCRIPT

"It was about September 18th. … On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the U.S. to the tune of $550-billion was being drawn out in in a matter of an hour or two.

The Treasury opened up its window to help, and pumped in $105-billion into the system, and quickly realized it could not stem the tide. We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. … If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.  We talked at that time about what would have happened. It would have been the end of our economic and our political system as we know it."

As readers know, several Congressional members have alluded to a private meeting with Paulson and Bernanke in which vague economic Armageddon was threatened if Congress did not immediately cough up $700 billion for Wall Street, with no oversight.  As the political debate raged over the next 15 days, several members expressed a sense of shock over the severity of the secret warnings, while refusing to divulge the details to a concerned public.  Representative Sherman of California later accidentally revealed that members were warned that Martial Law would follow if the $700 bailout plan were not approved quickly. Days later it was confirmed that the warning was delivered by Treasury Secretary Paulson.

READ MORE ON THIS TOPIC HERE

The U.S. Treasury's $2.4 Trillion Secret