Students of U.S. economics have zeroed in on an interesting paradox. I'm one of them who has.
(This will be a three part series offering the facts and my personal analysis of what we can expect the outcome to be.)
It was in October, 1907, that the U.S. financial system was within moments of collapse, and there was no mechanism in the wings to resolve the issues other than some weak "Scotch tape it together" ideas that the Treasury Department had.
This all started because a guy named F.A. Heinze had done some rather significant speculation in the stock market and he'd lost his shirt. The problem was that Heinze was a bank owner.
Depositors in his bank as well as the banks that did business with his bank were unsure what this was going to mean to them. Was money Heinze had used for his stock market speculations money he had borrowed from his own bank? If it was and he couldn't pay it back, would that mean that his bank would collapse and the depositors would lose their savings?
Well, J.P. Morgan was a well respected financier, and he knew that the only thing the Treasury Department could do was to move treasury deposits to the weak banks with the hopes that the banks would then be able to cover depositor withdrawals until the run on the banks was over, and confidence had been rebuilt.
Morgan unilaterally took matters into his hands. He talked - quite frankly, pressured -- solvent banks into bailing out their brother and sister banks by funneling money to them so that they could cover withdrawals. And he even made it clear to ministers that they'd best start preaching sermons aimed at restoring confidence.
It didn't take but a month or so for Morgan's plan to restore confidence in the system, and what is called the Panic of 1907 was short-lived with only Heinze being a loser of significance.
One hundred years later, there is a new crisis. Again investors have 
speculated where they shouldn't have - in sub-prime loans. Treasury Secretary Henry Paulson is trying his hand at putting into place a J.P. Morgan scenario with the hopes that his will be as successful as Morgan's was a hundred years ago.
Will it be? I'll offer some thoughts on that tomorrow. Part 2
Copyright 2007-William S. Cherry - All Rights Reserved
Part 2 - HOW THIS TRANSLATES TO A PROBLEM THAT HAS NO CLEAR SOLUTION. Tomorrow's Post
I would say that one major difference is back then it was a (very powerful) individual who put this in place. Once the panic subsided I'm sure things somewhat went back to normal. When governments get involved then it takes another powerful person to set things right again.
Though it is interesting to see that 22 years later, Black Tuesday occurred. What would have happened if government had stepped in and changed rules and regulations?
Bill, I'm really interested in your comments about this. I'll reserve my comments until then.
Bill Roberts