Friday, January 30, 2009

TARP = FDIC Default

Private FDIC insurance, plus FDR's promise of an unlimited government backstop if the bank's couldn't pay their insurance premiums, was set up to partially reimburse people when banks lost our deposits in ultra high leverage, wildly risky speculative schemes.

What are the implications of TARP replacing the FDIC?

I believe it will rapidly accelerate deflation. Now it makes sense for banks to increase leverage and place even bigger, more outlandish bets with our money on mega-margin. FDIC closure, while it still insures and rewards banker compulsive gambling, at least forces most bankers into rehab for a year or two.

TARP will give our current Depression much sharper teeth.

TARP may have forestalled 10,000 bank failures for a short time, but now that the U.S. government has defaulted on its FDIC promise to the people and instead paid the people's money to bankers, it makes perfect sense for bankers to squander FDIC cash on hookers and blow.


  1. Hi FDR, just trying to wrap my brain around this:

    Rapid acceleration of deflation by:
    1. the bankers taking TARP money for 'hookers and blow' and then

    2. Their bank defaulting anyway in another year or two?

    So, we lose the 700B in TARP, then another humpteen billion trying to pay for the FDIC to make somewhat good on it's promises to the depositors of the now defunct TARP bank?

    As always, admire your intellect and appreciate your willingness to share your conclusions.


  2. Hey FDR

    OutandIn here: I gotta question

    Do you think the treasury market is pricing in inflation or do you think it is a bear market rally?

    How far do you think prices will continue to deflate with all this freshly printed toilet paper just added to the system?

    Curious to your thoughts.

  3. "How far do you think prices will continue to deflate with all this freshly printed toilet paper just added to the system?"

    Previously I've posted and I still believe that any Treasury yield rise is due to massive new supply and it will be gobbled up at the direct expense of broad asset prices.

    In other words, we're in the middle of a minor blip upward in T bill yields, and a significant leg down in asset prices.

  4. OutAndIn here:

    I would agree with you but something interesting has been happening.

    Treasury prices have been falling AND stock prices have been falling. Gold has been rising.

    The dollar is strong only because the Euro sucks even more. But is this a good reason to own dollars? I have said I think gold is good b.c the fundamentals of all fiat currencies are unsound. In other words, I don't want dollars, euros, or yen. I think all three currencies are at risk for collapse.

    To be honest I don't like treasuries either. California is already bankrupt and a state that is struggling to meet existing needs (other states are in trouble too) As far as I am concerned the credit worthiness of the U.S is DOWNGRADED, and as such not a good reason to own U.S debt.

    Your thoughts?


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