Thank you, Tim

What an ungrateful lot we are. Two years ago, Ben Bernanke, Hank Paulson, Tim Geithner (and Gordon Brown) saved the financial system from collapse.   Despite a banking crisis far worse than the 1929 stock market crash, we have, thanks to the Tarp boys, avoided a repeat of the Great Depression. Have we built them a statue at the foot of Wall Street?  No, instead we whine that we haven’t gotten back to the halcyon days of 2006. It's as if Dad bailed us out of jail after a coke binge and we complain that we aren’t high anymore.

In an Op-Ed in today’s New York Times, written in the form of a thank you note to his Uncle Sam, Warren Buffet reminds us how close we were to disaster. Not only were the remaining big investment banks on the edge of bankruptcy but  “Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. . . Only one counterforce was available, and that was you, Uncle Sam.”

In summer 2008, lenders were so confident they were happy to front money to Indonesia at miniscule interest rates. By October of that year, they were spooked about lending even to Citibank. The key thing to remember about banks is they don’t lend their money, they lend your money, the depositors' money. And depositors are only willing to put in cash if they are confident they can get it back. It is the value of the loans on the asset side of banks’ balance sheets that give depositors the security that their money is safe.

The panic made the big wholesale depositors pull their funds, so banks had to sell assets (i.e. loans on their books) in order to find cash for the redemptions.   But since everyone was selling those toxic securities, their value collapsed even further, which meant the big banks were approaching insolvency. Without access to short term funds, the large money centre banks would go bust.

Government intervention stopped this vicious cycle.  With its almost unlimited access to credit, it could make  sufficient capital available to tottering banks.  By expressing a willingness to buy assets others were dumping, governments put a floor under asset prices. As soon as banks saw they had a buyer for their hard to sell assets, the panic began to subside. Markets were reassured the banks would not go under. Interbank lending returned, credit again was extended. The panic, if not the crisis, was over.

Yes we can all quibble it could have been done better.  Yes the bailout rewarded the very same individuals and institutions that got us into this mess. Yes, moral hazard has once again increased.  Yes, unemployment remains painfully high as the private sector continues to deleverage, paying off debt rather than incurring more. But had the US and British governments not acted courageously and decisively, we were days or weeks away from ATMs not spitting out money when you stick in your card and great corporations being forced to close shop  having run out of working capital and. Buffett’s letter reminds us how much worse it could have been. Thank you Tim.  Thank you Gordon.