Are Our FDIC Deposits Safe And Will The FDIC Run Out Of Money?
As a follow up to my remarks of a little over a week ago, we are going to look into the FDIC. I want to make a few comments first because the blogosphere in particular is full of people who have dedicated a substantial amount of brain waves highlighting the crisis of funding at the FDIC and how it is eventually going to turn into a major crisis. I first have to warn you that there are many very, very complicated mathematical formulas and compound sentences in here. Along with a few dangling participles. You might have to take a refresher course in third grade comprehension before you continue with this very, very complicated topic.
The concern about the FDIC reminds me of a scene in one of the Indiana Jones movies. Indiana is met in the street by a formidable adversary who draws a sword and goes about impressing onlookers with his tremendous display of swordsmanship. It appears as though Indiana is completely doomed and about to lose his life or limb. But then what happens? All of a sudden Indiana pulls out a gun and without expression nonchalantly shoots his adversary dead. Almost as if it were an afterthought. He shrugs it off and continues about his merry way. And that is what we are going to do today. After all of the debates and intellectually-reasoned arguments of why we should fear the fate of the FDIC, we're going to pull out a gun and shoot the arguments for what they are - lots of hype without merit just like the swordsman.
I have had this discussion with more than a few people offline over the last year or so. People are concerned that they will lose their money if the government is insolvent and cannot replenish the FDIC. Well, the government is in serious straights and most certainly will have a funding crisis. The ability of the government to fund its empire of global meddling is bankrupting the country but FDIC insured deposits are a separate issue.
Typically, the FDIC uses bank fees to fund their insurance pool for insured accounts. This approach should be a constant reminder to banks that their mistakes have a price. That pool is running low because of a reasonably large number of bank failures. (Obviously no where near the Great Depression levels. At least not yet.)
If the FDIC is ever in a position where it cannot raise enough fees from banks to keep their insurance fund solvent, I'm not sure what they will do but I can tell you exactly what they can do. It involves some very complex mathematical formulas, lots of time consuming calculations and countless hours of detailed analysis by a roomful of analysts of the intellectual caliber of Albert Einstein. Okay are you ready? They should print it. And you should write Sheila Bair, Ben Bernanke, President Obama and even that toady Timothy Geithner to tell them to print it. In fact, it would be criminal were the FDIC to ever borrow money from the private market, ie issue new government debt, were its funds ever depleted. New debt to replace money that already exists? Lunacy. Were we to see a terrible banking calamity, all the government would need to do is print the replacement money. It's simply replacing existing savings. Because a bank fails doesn't mean FDIC insured savings must disappear. Even if the FDIC funds are spent.
The concern about the FDIC reminds me of a scene in one of the Indiana Jones movies. Indiana is met in the street by a formidable adversary who draws a sword and goes about impressing onlookers with his tremendous display of swordsmanship. It appears as though Indiana is completely doomed and about to lose his life or limb. But then what happens? All of a sudden Indiana pulls out a gun and without expression nonchalantly shoots his adversary dead. Almost as if it were an afterthought. He shrugs it off and continues about his merry way. And that is what we are going to do today. After all of the debates and intellectually-reasoned arguments of why we should fear the fate of the FDIC, we're going to pull out a gun and shoot the arguments for what they are - lots of hype without merit just like the swordsman.
I have had this discussion with more than a few people offline over the last year or so. People are concerned that they will lose their money if the government is insolvent and cannot replenish the FDIC. Well, the government is in serious straights and most certainly will have a funding crisis. The ability of the government to fund its empire of global meddling is bankrupting the country but FDIC insured deposits are a separate issue.
Typically, the FDIC uses bank fees to fund their insurance pool for insured accounts. This approach should be a constant reminder to banks that their mistakes have a price. That pool is running low because of a reasonably large number of bank failures. (Obviously no where near the Great Depression levels. At least not yet.)
If the FDIC is ever in a position where it cannot raise enough fees from banks to keep their insurance fund solvent, I'm not sure what they will do but I can tell you exactly what they can do. It involves some very complex mathematical formulas, lots of time consuming calculations and countless hours of detailed analysis by a roomful of analysts of the intellectual caliber of Albert Einstein. Okay are you ready? They should print it. And you should write Sheila Bair, Ben Bernanke, President Obama and even that toady Timothy Geithner to tell them to print it. In fact, it would be criminal were the FDIC to ever borrow money from the private market, ie issue new government debt, were its funds ever depleted. New debt to replace money that already exists? Lunacy. Were we to see a terrible banking calamity, all the government would need to do is print the replacement money. It's simply replacing existing savings. Because a bank fails doesn't mean FDIC insured savings must disappear. Even if the FDIC funds are spent.
This is not profligacy, it's not illegal, it won't cause inflation, it won't hurt government bond holders, it won't destroy the dollar or any other fear-mongering statements that can be dreamed up.
The concept of federally insured savings is so that our money will be safe in times of crisis. Print the replacement money. That is society's savings. I didn't use my savings to invest in risky schemes or failed trading strategies or derivatives. Or loan my money to speculators or unsound business ideas. Banks did that. My savings are not owned by any bank and are not part of any bankruptcy proceedings other than my own. My savings are mine and they are federally insured to be safe from criminal banksters, fraud, banking crises and poor business decisions by banks or borrowers.
One of the greatest crimes against the American people happened under the Herbert "I helped create the Great Depression" Hoover administration. Before Roosevelt was elected and saved us from neoliberal economic ideology that ironically also caused our current crisis courtesy of the same neoliberal economics and America's greatest central banking buffoon Alan Greenspan. (That Frontline special I remarked of earlier this week was absolutely abhorrent - indicting Congress, the Clinton administration and Greenspan as complete dolts. Something we now all know.) Anyway the Hoover administration adhered to a concept that is now embraced by some of these fringe interpretations of economics shared by many modern0day Hoover-ites. That is, the only way the economy will cleanse itself is to let the system collapse. Or let the chips fall where they may. This is the ideology of the mathematically challenged. It is apparent anyone with this perspective doesn't understand either complex systems or gaming theory. Otherwise they would disavow such lunacy. And there are some very prominent financial bloggers who believe and perpetuate this gibberish. Bad debts need to be taken care of but this can be handled by any number of actions. None of which involve letting the system collapse or the chips fall where they may. We have criticized this lunacy numerous times. It's the same argument that regulation doesn't work. Or markets are self-regulating as Alan Greenspan argued. In fact, re Frontline, Greenspan argued that fraud should not be regulated. In my opinion, if the Frontline story is based in fact, Greenspan has a primary role in the fraud and ultimate collapse of Wall Street.
Anyway at the onset of economic crisis post 1929 we saw some of this "let the chips fall where they may so the system will cleanse itself" in action when neither the Federal Reserve nor Hoover's administration did anything as banks started failing. Eventually upwards of five thousand banks failed. Before Washington clowns knew what was happening, it was too late. The crisis had metastasized well beyond their worst fears and we were in the greatest crisis in America's history. It was too late to reverse any damage. Maybe they didn't cause the crisis but they didn't do anything to ameliorate the situation either. Along with those thousands of bank failures went the savings of innocent, hard working Americans. Why? Because the neoliberal Hoover-ites (I would classify them in the same category of what we now see as modern-day radical interpretations of Austrian economics.) running the country thought that the system needed to cleanse itself and we'd soon be back to normal. How'd that work out for you? I bet Herbie would do things a little differently next time.
So, what would the Great Depression have been like were the Federal Reserve to have guaranteed people's savings and printed their lost savings as banks failed? Who knows. I don't have the statistics of how much of society's savings was lost. That time would have been horrible regardless but we do know it that were much of society's savings not lost, it would have made some constructive impact on the crisis comparative to sitting back and letting the world collapse. There's some great merit to many concepts in Austrian economics. But there are a lot of fools who have no idea what they are talking about espousing radical interpretations that are pure nonsense.
So, what would the Great Depression have been like were the Federal Reserve to have guaranteed people's savings and printed their lost savings as banks failed? Who knows. I don't have the statistics of how much of society's savings was lost. That time would have been horrible regardless but we do know it that were much of society's savings not lost, it would have made some constructive impact on the crisis comparative to sitting back and letting the world collapse. There's some great merit to many concepts in Austrian economics. But there are a lot of fools who have no idea what they are talking about espousing radical interpretations that are pure nonsense.
Our savings should be protected at all cost. Federally insured deposits need to be federally insured. I could care less about troubled banks themselves. Sell them off, let them fail, sell their assets or close them. And if necessary through some course of emerging crisis, the FDIC should bump the limits on savings accounts if that is needed to ensure stability.
There are people in prison who are guilty of much less than what many politicians and central bankers did before and during the Great Depression. And ironically, even after witnessing such lunacy, eighty years later many of these beliefs are still clung to by neoliberal nuts.
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