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'A new kind of bank run'

August 9, 2007 |  8:38 pm

GlumtraderapA well-read friend send us this link tonight, saying this was the best explanation he's yet seen of what's happening in the mortgage markets.
What's happening, according to New York Times columnist Floyd Norris, is a "new kind of bank run."

The problem, Norris argues, is that's it's not a run on federally insured and federally regulated banks; it's a run on loosely regulated securities that now form the backbone of the modern debt market. That means it will be more difficult for the Federal Reserve -- or any other regulatory body -- to manage the crisis: The Fed, Norris writes, has little regulatory authority over these securities, and may not even know who owns them. "With the worth of those securities now being questioned — and no equivalent of deposit insurance — some who financed the securities want their money out, a fact that has created the 21st-century equivalent of a run on a bank."

This is not just a Wall Street story; Under the credit system that is now freezing up, Wall Street investors provide the money for Main Street loans. If Wall Street investors lose faith in the system, Main Street borrowers will be frozen out.

Is that happening now? The president today tried to reassure the nation that it's not -- that there is no credit squeeze, or freeze: ".. I am told there is enough liquidity in the system to enable markets to correct," he said.

Thoughts? Comments? Insights?
Photo Credit: AP