Sunday, March 29, 2009

FDIC Charges and Defaults

"Can you give some examples where a depositor with an account at an FDIC-insured institution which was below the FDIC maximum insured amount managed to lose money"

Ok.

First, each and every day, every bank account holder loses the premiums that the FDIC charges all banks to create the reserve base. That is passed on to all depositors in the form of fees. The FDIC is in the process of massively increasing insurance premiums which will be passed on. Insurance companies will always say that no beneficiary has ever lost money, conveniently forgetting all the premiums paid over time.

In the future, who knows how much that will cost depositors. And just like the feigned "outrage" with AIG, congress could charge "banks" (that means depositors) trillions more to cover their ghastly FDIC coverage shortfall.

Second, all of the TARP I and TARP II money was a FDIC default. Dead banks were consolidated instead of closed. This cleaned out stock holders as a substitute for FDIC obligations.

We also saw the rampant theft of $trillions by non-bank ambulance chasers, like Goldman Sachs, who magically turned into a bank to steal the FDIC's TARP funds to float their own business failure. So we have no idea what it will take to bailout the FDIC over and over again in the future, or if two or three rundant bailouts is all they'll get.

Third, anyone who experienced an actual FDIC takeover lost all of the interest from CDs over the time they held them. If the FDIC insured CD is brokered, which many are, CD holders lost most or all of their principal.

We also know the FDIC has never been tested by a depression. They had a $15T coverage shortfall at the $100K limit; I have not seen updated figures since their obligations were massively increased.

19 comments:

  1. Yeah - still looking for that Goldman-Sachs outlet branch!

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  2. Don't know if you guys saw this quote from Goldman Sachs' own Blankfein from the other day concerning Glass-Steagall, but thought it too funny and maddening not to share.

    “Anyone who’s subject to the regulatory scheme that we’ve had up to this point can’t be happy with the state of regulation,” Blankfein said in an interview with Bloomberg Television afterward. “It is an alphabet soup of agencies.”

    Still, bringing back Depression-era regulations, such as one separating investment banking from commercial banking, would be difficult, Blankfein said. “It’s hard to turn back the clock,” he said.

    The Glass-Steagall Act that separated deposit-taking institutions from investment banks was overturned in 1999 with the passage of the Gramm-Leach-Bliley bill.

    http://www.bloomberg.com/apps/news?pid=20601070&sid=aoXhaz0zeNPk&refer=home

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  3. Excellent examples, but you still failed to give an example where a depositor with an account at an FDIC-insured institution which was below the FDIC maximum insured amount managed to lose money.

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  4. A simple example would be if enough depositors came in at once to demand their deposits. In our fractional reserve banking system, there are not nearly enough physical dollars to cover the electronic deposits.

    Therefore you might have to wait a while, and by the time they crank up the press to give YOU your money, a loaf of bread may cost $100.

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  5. Anonymous wrote: "Therefore you might have to wait a while, and by the time they crank up the press to give YOU your money, a loaf of bread may cost $100."

    Maybe. But doubtful. If the loaf of bread costs that, it will be as a result of supply and demand, not the size of the money supply, unless massive hyperinflation has occurred as a result of other forces.

    Printing cash does not itself do anything at all to the size of the money supply. Cash is just one of the two forms of money (the other being deposits at a bank). For the cash to be issued to someone, their deposit has to be reduced by the same amount.

    So the money supply remains conserved when cash is printed.

    In any case, the scenario you describe does not result in the depositor losing *money*, but it does result in him losing *value*. But as we know, that is normal in our centralized fractional reserve banking system anyway.

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  6. I just don't see how inflation to the point of $100 bread can happen. The country will self-destruct first. If we have $100 gas, you just don't buy gas. As there is no way a wage/price inflationary spiral can occur in this country, as soon as bread hits $20, people will be eating each other.

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  7. "Printing cash does not itself do anything at all to the size of the money supply. Cash is just one of the two forms of money (the other being deposits at a bank). For the cash to be issued to someone, their deposit has to be reduced by the same amount."

    It does if the gov't is duplicating an existing electronic deposit that can't be covered due to a lack of physical dolars caused by a bank run.

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  8. "If the loaf of bread costs that, it will be as a result of supply and demand, not the size of the money supply, unless massive hyperinflation has occurred as a result of other forces."

    True, to a certain extent. Inflation, or hyperinflation for that matter, is a symptom of an increase in the money supply (or debt).

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  9. All good post. I think what you can learn from all the post, is spread the ways you protect your cash. We are in uncharted waters and rough seas are coming.

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  10. This comment has been removed by the author.

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  11. Anonymous wrote: "It does if the gov't is duplicating an existing electronic deposit that can't be covered due to a lack of physical dolars caused by a bank run."

    But the government isn't *duplicating* an existing electronic deposit. They're *substituting* the printed cash for the electronic deposit.

    There may be a very, very small window during which the total money supply is increased as a result of the physical cash existing at the same time that the electronic deposit does, but the physical cash printed this way is *not* in circulation (well, not unless someone steals it and then uses it), so in terms of the effects on the economy the printing of cash in this case has no effect.

    What the run on the bank does is reduce the reserve against which the bank can lend. If it goes low enough, the bank has to cease lending operations until it can find additional funds. Since the entire banking system is built around lending, that effectively shuts the bank down. And during the time of the Great Depression, that was enough to cause the deposits to disappear because the bank as an entity ceased to exist.

    With the FDIC in place, that no longer happens. And that means you won't see massive currency deflation unless the U.S. government itself goes into bankruptcy. It's not clear to me if the dollar will even be worth anything in that scenario.



    Anonymous also wrote: "True, to a certain extent. Inflation, or hyperinflation for that matter, is a symptom of an increase in the money supply (or debt)."

    Actually, currency inflation or hyperinflation (which is what I was talking about) are *defined* as an increase in the money supply. But what I was really trying to convey is that the massive inflation you were talking about would not have happened as a result of runs on banks. Something else would have to cause it, such as a change to the fractional reserve lending rate to allow more loans to be issued against existing deposits and a spate of new loans being issued subsequently.

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  12. "With the FDIC in place, that no longer happens. And that means you won't see massive currency deflation unless the U.S. government itself goes into bankruptcy.

    The government can't print money, nor can they print currency.

    See: http://fdralloveragain.blogspot.com/2009/01/banker-bailouts-will-never-end.html

    Everything the government spends is counteracted by the requirement to collect much more (due to interest and overhead). Like any friction, the government can only drain currency.

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  13. I'm starting to get it...

    the more government prints money today, the more they are net draining future buying power by ever increasing interest payment to central bankers.

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  14. FDR wrote: "The government can't print money, nor can they print currency."

    Is that so?

    From the Wikipedia entry on the Federal Reserve System (http://en.wikipedia.org/wiki/Federal_Reserve):

    "The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells it to the Federal Reserve Banks at manufacturing cost, currently about 4 cents per bill for paper currency. The Federal Reserve Banks then distribute it to other financial institutions in various ways."


    So yes, the government *can* print money. But as things stand right now, it distributes it through the Fed.

    As I said, if the FDIC is no longer able to perform its function, it almost certainly means that the U.S. government itself is bankrupt, that it has exhausted all means by which it might finance itself, and is unwilling (for whatever reason) to print its way out.

    I'm curious what you believe the value of the dollar will be under those circumstances.

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  15. Please read:

    http://fdralloveragain.blogspot.com/2009/01/can-fed-print-more-currency-to-counter.html

    All of your questions are addressed there.

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  16. This comment has been removed by the author.

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  17. The article you referred to doesn't say anything that I haven't already said. But it ignores some vital points that have not been answered:

    1. A debt-based currency is ... surprise! Debt-based! So *of course* the answer to debt is more debt ... because in such a system, debt is all there is.

    2. Currency deflation in such a system by definition means that there's *less debt*, which is generally *bad* for bankers. However, in this case, the money that's lost belongs to the depositors of the failed banks, so from the standpoint of the bankers, that's probably okay.

    3. Currency deflation would force the U.S. government to default on its current obligations, because after currency deflation there's no way the U.S. government would be able to collect enough in taxes to service the debt. Oh, by the way, this also means any treasuries you have become worthless, because there'd be no way for the U.S. government to pay them.

    4. The current system is the result of the cooperation between the bankers and the U.S. government. With the U.S. government where it is right now, massive currency deflation would put the power of the U.S. government at risk. In other words, it would suddenly make the U.S. government and the bankers *enemies*, because it is the debt itself that would put the government's power at risk. And in that situation, the bankers would lose, because the government, not the bankers, controls all the guns.

    That goes straight back to the point I made some time ago about power: if you don't control the guns, you control nothing. A debt cannot be enforced (meaning: seizure of the collateral) except through the barrel of a gun. The massive assets (such as the U.S. military) under control of the U.S. government are influenced by the bankers only because the decision makers in the U.S. government relied on the bankers to get elected. But if the survival of the government itself is at risk, the government will do what it must to keep going, even if it means taking the bankers out.


    Conclusion: on balance, it's better for the bankers to keep financing the U.S. government *and* for the U.S. government to keep the FDIC going, because failure of the FDIC would cause massive currency deflation, which would threaten the power of the U.S. government and therefore make the bankers into enemies of the U.S. government -- a situation that would be very, very bad for the bankers.


    Oh, one more thing: just because the U.S. government currently distributes money via the Fed doesn't mean it *has* to. Laws can be changed at the stroke of a pen, and only law constrains the government in this way.

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  18. "Conclusion: on balance, it's better for the bankers to keep financing the U.S. government *and* for the U.S. government to keep the FDIC going, because failure of the FDIC would cause massive currency deflation, which would threaten the power of the U.S. government and therefore make the bankers into enemies of the U.S. government -- a situation that would be very, very bad for the bankers."

    Not until they squeeze every last penny out of taxpayers during this bust cycle.

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The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

 
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