Credit Crises Nothing New -- 1907 Tells Us So

Because deposit-taking institutions typically keep only a small percentage of cash on hand, the result of a run is frequently the failure of the institution. The lack of financial transparency only adds to such jitters.

Due to the way financial markets and institutions are interlinked, the demise of one firm, such as Heinzes' stockbroker, can frequently precipitate runs on other firms. As Bruner and Carr say, "Trouble travels." And in 1907 that's exactly what happened, but with no Fed to help calm market participants (it was formed in 1913 in response to the '07 mess), it looked like things might spiral out of control.

Legendary money wizard J.P. Morgan, however, then stepped up, corralling a group of financiers to provide capital to help shore up faltering institutions. But even Morgan couldn't save the Knickerbocker, one of the largest trusts in the country, as panic truly started to take hold in October 1907 -- similar to Countrywide's current woes.

Perhaps the most worrying present-day corollary to the bank run, however, is hedge fund redemptions.

Poor returns at some funds caused by the mess in the subprime mortgage market will likely lead to some significant withdrawals. What will be the overall magnitude of those cashouts?

The lack of transparency within the hedge fund world only increases the uncertainty, and may even induce some present-day investors to throw in the towel simply because they cannot discern what's really going on.

While uber-rich hedge-fund investors reeling from a bad month in the market may not be the most sympathetic characters, the rest of investors should care how they react -- the financial markets are all interlinked. That's how the deteriorating subprime mortgage market may eventually suck down all assets from stocks to corporate bonds through to gold, oil and soybeans.

It's clear from The Panic of 1907 that Morgan was a hero for charting a course through a financially stormy period; whether Bernanke has the deft touch required to right the listing liner that is the U.S. economy, or whether his 50-basis-point cut in the discount rate was more akin to a finger in the dike, remains uncertain. Time will no doubt tell.

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