Broke-Ass Student

The FDIC Deposit Insurance fund is “a myth,” according to longtime banking consultant Bert Ely, and consumers may end up paying the price of what is expected to be a growing wave of bank failures.

Concerns Mount About FDIC Deposit Fund
Global Financial Newswires
July 18, 2008

NYU Economics Professor Nouriel Roubini predicts that Congress will have to intervene in order to bail out the FDIC deposit fund.

“They’re going to run out of money, with certainty,” he predicted. “Congress is going to have to recapitalize the FDIC, those $50 billion plus is not going to be enough, by no means.”

Indeed, on Friday afternoon FDIC Chairman Sheila Bair said in an interview on C-SPAN television that banks holding brokered deposits may be charged higher premiums in order to bring back the reserve to an acceptable size.

This means higher premiums for FDIC insured banks, analyst Ely noted, further complicating an already tenuous situation for the U.S. banking system. Banks will most likely pass the increased costs onto their customers, he said.

“Banks are going to pass it through to their customers through higher interest rates on loans, lower interest on deposit,” Ely predicted.

The FDIC has around $53 billion set aside to back up bank deposits up to $100,000 per depositor, one of the ways the organization is designed to ensure confidence in the banking industry. However, according to Ely, that $53 billion is “not really available.”

“The deposit insurance fund is as real as the social security trust fund,” Ely said, noting that only a “small fraction” of the $53 billion is actually available and “any losses beyond that will be assessed on the banks.”

Ouch, ouch, ouch. All around painful stuff.

I explored the topic of FDIC Banking Insurance in Is Your Money Safe In The Bank? and there is simply no comforting news coming from the sundry financial sectors as of late.  How many more banks will prove to be fallible as giant financial oligarchies struggle to deleverage themselves on borrowed time?

James Grant from The Wall Street Journal shares a blistering yet spirited debate as he questions why folks aren’t displaying more antagonism and widespread condemnation toward such a crass financial crisis. A crisis, he admonishes, where the brunt of burden will be laid upon honest hard working taxpayers to bail out unscrupulous lenders, even as the Federal Reserve continues to shower gluttonous financial support toward the people who would seem to need it least.  

A malign doctrine, Grant argues, that has sacrificed the quality of the Federal Reserve’s own balance sheet while simultaneously allowing the average American’s hard-earned dollars to suffer.

Yet the populace victims have been amazingly tolerant and protest ever so softly.

Why No Outrage?
The Wall Street Journal
July 19, 2008

… the Wall Street of the Morgans and the Astors and the bloated bondholders is today an institution of the mixed economy. It is hand-in-glove with the government, while the government is, of course — in theory — by and for the people. But that does not quite explain the lack of popular anger at the well-paid people who seem not to be very good at their jobs.

Since the credit crisis burst out into the open in June 2007, inflation has risen and economic growth has faltered. The dollar exchange rate has weakened, the unemployment rate has increased and commodity prices have soared. The gold price, that running straw poll of the world’s confidence in paper money, has jumped. House prices have dropped, mortgage foreclosures spiked and share prices of America’s biggest financial institutions tumbled.

Now began one of the wildest chapters in the history of lending and borrowing. In flush times, our financiers seemingly compete to do the craziest deal. They borrow to the eyes and pay themselves lordly bonuses. Naturally — eventually — they drive themselves, and the economy, into a crisis.

And to the scene of this inevitable accident rush the government’s first responders — the Fed, the Treasury or the government-sponsored enterprises — bearing the people’s money. One might suppose that such a recurrent chain of blunders would gall a politically potent segment of the population. That it has evidently failed to do so in 2008 may be the only important unreported fact of this otherwise compulsively documented election season.

Have We the People unwittingly tarried by neglecting to decry our fragile emplacement - indeed becoming too complacent - even in the midst of being plundered by such saucy financial debauchery?

It’s always good to remain critical, and these debates certainly serve as prudent motivational reminders to continue developing a sharp awareness of where our money is going and how it’s being utilized.

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Sayings of the Wise

If the American people ever allow private banks to control the issue of their  currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of  all property until their children wake-up homeless on the continent their fathers conquered … The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. - Thomas Jefferson

Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety. - Benjamin Franklin

[On leaving Independence Hall at the end of the Constitutional Convention in 1787, Benjamin Franklin was asked "Well, Doctor, what have we got -- a Republic or a Monarchy?"] According to Dr. James McHenry, a Maryland delegate, Franklin replied, “A Republic, if you can keep it.”

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