Re: Y2K

Peter C. McCluskey (
Thu, 18 Feb 1999 09:01:01 -0800 (Max More) writes:
>>3. Bank runs: these are pretty much inevitable late this year. The
>>government can shut down the banks to stop them, but that will make
>>matters worse. They're already printing out more money and that's
>>not going to solve the problem.
>Why isn't it going to solve the problem? It's possible that if irrational
>hysteria builds, then far more money than expected will be withdrawn. But
>the Fed can handle even that, so long as it doesn't all happen in a day. If
>people draw out extra cash over weeks or months towards the end of the
>year, there will no real problem. Banks will be fine.

If the Fed loans banks unlimited amounts of cash with little regard to the bank's ability to repay the loans, then they can fairly reliably prevent runs on the banks before Jan. 1. But that strategy will probably cause significant inflation, inflation, and invite a repeat of the kind of recklessness that produced the worst of the S&L failures, so the Fed will be hesitant to act as if runs are likely without clear evidence of an imminent panic.

As long as the banking system is fuctioning smoothly and there is little reason to expect more than a few days interruption in basic services, it is irrational to withdraw large fractions of one's account, because it becomes much less convenient to pay many bills if you can't mail a check. I expect that about 50 million people in the U.S. will withdraw about $1000 each in December, and that the system can handle that without major disruptions.

Consider what happened in the U.S. in January and February of 1933. With some of history's worst bank failures fresh in people's minds, and with FDR's advisors clearly hinting that they would abandon the gold standard or devalue the quantity of gold for which they would redeem Federal Reserve Notes (which given the strange quasi-gold-standard meant that dollars withdrawn from banks as gold would retain their value, while dollars kept in banks could be expected to lose value), it's hard for me to understand why informed people didn't withdraw all their dollar-denominated deposits from banks. The attitude of the incoming administration was reasonably public by January, yet there was little panic until the last week of February. This shows both that it takes pretty clear evidence of dangers to produce a system-wide run on banks (evidence which I don't think Y2K provides), and that even then people will wait til the last minute.

>actually cause a rise. Either way, I think it's impossible to time market
>drops and rises. If you're a long-term investor it makes sense to ride it

Beliefs that are common mainly near market tops. At current p/e's, the chances of a buy and hold investor doing well are low. I recommend keeping a close eye on 3 month t-bill rates, and selling when rates show a clear upward trend.

>>I won't even mention oil; the Middle East is almost as doomed as Asia.
>Any information to back up this claim? I would think they could afford to
>update their systems, though that doesn't mean they have.

Oil futures and other futures contracts provide as good an estimate as any of the risks of major disruptions. The oil futures market is saying quite clearly that there is no problem. The only futures markets that indicate a problem are the short-term interest rate markets, which predict a 30 basis point rise in rates from September to December (which, given the stock market's high price might be enough to cause a significant correction). (Brent Allsop) writes:
>more cache than this in their house right now. Isn't this a big
>reason the Fed came up with the new currency to handle all this extra
>demand? There was a huge drain of cache during the stock market fall
>back in 87, something that would have surely caused major problems 100
>years ago. But the Fed was ready and flooded the system with whatever
>it needed. Some banks had to pay high interest to get access to it
>for the short time required but what was required was made available

This is mostly fiction. As far as I could see, banks paid lower interest rates. I don't know what evidence you have of a "huge drain" of cash; many brokerage accounts presumably ran low on cash, but I don't think much happened elsewhere. And the Fed's "flooding" of the system was more rhetorical than financial:

        Monetary Base                Currency in
        Seasonally                   Circulation
        Adjusted                     Seasonally Adjusted
871007    265.9            871005      192.4
871014    266.1	           871012      192.5
871021    263.3	           871019      192.9
871028    267.8	           871026      193.9
871104    266.3	           871102      194.4
871111    266.4	           871109      194.7 ( writes:
>I saved a news posting a few months ago which has a rather detailed
>analysis of the money stock, cash reserves, cash in circulation,
>bank accounts, etc. I also found it on a web site but I can't
>find the URL now. The posting was based on information at
> if you want to verify the details.

For raw data such as I produced above, is the place to look first.

Peter McCluskey          | Critmail ( | Accept nothing less to archive your mailing list