"I have a jumbo cd getting 4.25% untill October of 09. Please give me your advice, I know others are in my boat too !"
The bottom line is that if you want 4.25%, you'll have to take substantial risk. I own no CDs and no MMFs, because these are promises to pay by bankrupt institutions or by second hand brokers on behalf of bankrupt institutions.
Some CDs are insured by the private FDIC, some are not, others say they are, but are not. So be careful.
For example, if you buy a brokered piece of a Jumbo CD that pools buying power to pump up the bank rate of return, then the note probably lists the broker's name as the beneficiary, not you. The broker might divide the CD into portions, and accurately portray the note as FDIC insured, but the insurance could be insufficient after it stops at the FDIC limit. Even if the (stone broke) FDIC actually paid on the note when the bank couldn't, brokered-CD holders would probably be left with nothing. What little was paid would go to cover the broker's losses.
That is the kind of risk you take in this kind of market, which is why I do not recommend CDs, MMFs, or even holding a significant amount of cash in a bank account.
Realize that any bank paying you more than the Treasury rate (near 0%) is counting on their ability to inflate the dollar supply from new borrowing, in other words, their Ponzi scheme continuing. If they can't lend to others, they can't pay you.
Think of all banks as FICO-400 subprime borrowers who are already in default (that's what "bailout" means, right?). Sure, you can accept their promise to pay you a high rate, but you both know there is no hope of the arrangement working over the long run.
Sunday, February 22, 2009
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I remember you saying a while ago, FDRAOA, that the banks which fold first, will be the ones with the highest interest, as those who are in most trouble will offer the highest to attract the most customers.
ReplyDeleteIn this market, those who continue to be greedy will die. This is a time to consolidate. In a deflationary economy, by just doing that, you make a killing.
My question. What was that about the safety of safety deposit boxes? Surely they can't touch that?
N M B's.
Thanks for the answer to my CD question FDRAOA.I should have told you that it was a 3 yr CD from the top rated Credit Union here in the state.I didnt know if you felt differently about smaller banks and Credit Unions. I miss your comments on MW, but have enjoyed the blog even more. I have passed this site along to my many friends. Your knowledge and insite is a treasure to us who try and want to understand the current conditions in the money world Thanks again.
ReplyDeleteAs I understand it when the FED writes a check there is no account from which those funds are drawn.
ReplyDeleteSo, what happens if the FED starts buying T-bills? Seems like that would be a way for new currency to be created and distributed (via the Federal Government) without being "loaned" into existence.
Is that not inflationary?
I've been trying to educate myself on the workings of our financial system but haven't found too many great sources. Any suggestions?
Thanks!
FDR, I too would like to see you answer the rest of this commenter's question. I really enjoy your blog, and have been wondering for some time about your stance on credit unions. They're run differently and insured by a different federal agency. What is your take on their relative risk?
ReplyDelete