New thoughts on the Global Money Crisis

An interesting article in SMH Business Day explains how the sudden credit crunch one year ago was caused more by a loss of confidence in commercial paper, than by individual bank failures or crashing house prices. The article explains how, just 13 hours after the failure of Lehman was announced on 15 September 2008, a crisis of confidence had led to enormous withdrawals being made. Reserve Primary bank had $US785 million invested with Lehman, which was quickly revalued to 80% of that, which in turn meant RP had to sell assets to meet its legal obligations. And they found there were no buyers! As one industry veteran said, "how do you set prices for securities when nobody is buying?"
But the experts, such as Poulson and Bernanke, were concentrating on the headline grabbing problems like AIG, and the article suggests they just didn't notice what was happening to the money markets.
On the 16th September RP's trustees valued their Lehman assets as worthless. RP could no longer raise cash to meet withdrawals. "The best way to get your dollar back is to ask for it before anybody else." And everybody was asking for their money back. And the rest is history.