For a minute there I thought I had to get off my couch, when all the while the fact is we don't have to do anything much but keep things afloat for just a few decades more! In fact, we'd best shut up about PO, because if our offspring finds out we knew about it all along, they'll turn and wring our necks come 2036!
Posted: Wed Mar 26, 2008 7:37 pm Post subject: Let's talk about FDIC
We all know that the FDIC is supposed to protect our savings if there is an economic crisis and our bank fails. The money FDIC uses to do this is kept in something called the Bank Insurance Fund(BIF). The BIF reserves are measured in terms of a reserve ratio, i.e. the ratio of BIF assets to insured deposits. By statute, FDIC is required to keep the BIF reserve ratio at 1.26%. I recently bumped into a newspaper article that mentioned that in 1991, the BIF had a negative reserve ratio, i.e. the BIF became insolvent. I thought that was pretty amazing. Here's a graph of the BIF reserve ratio:
So in fact FDIC was made temporarily insolvent by bank failures in the 80's and early 90's. There's a paper here by an economist at FDIC using a computer model to estimate the chances of it happening again. link The long and short of it is that if you assume that bank failure rates will be about what they've been, the chances are about 3% of BIF becoming insolvent again. If you assume the losses in a future crisis will be about twice what they were in the 80's, there's a 50% chance of the BIF becoming insolvent.
What he also breezes by, without much mention is that in a financial crisis the assets in the BIF could loose value. That scenario is not accounted for in the 50% figure. Looks like the BIF is invested almost exclusively in Treasury Securities:link. I would assume that would make for good liquidity and low risk, though it would be pretty vulnerable to inflation, since only $6bn of the $35bn pool is in TIPS, right? _________________ "I was born in a deep forest
I wish I could live here all my life
I am made from stones and roots
My home, these woods and roads
All my life I loved this sound
Of the woods all around
Eagles fly where the winds blow free" -Korpiklaani
Joined: Oct 23, 2004 Posts: 5489 Location: New Jersey
Posted: Wed Mar 26, 2008 8:29 pm Post subject: Re: Let's talk about FDIC
Although the FDIC is kind of a mandatory insurance for the banks, in the event of insolvency the government would pay out the losses or loan money to it.
Ultimately much of any deficit that results would be paid for by the American taxapayer.
Last edited by DantesPeak on Wed Mar 26, 2008 8:45 pm; edited 1 time in total
Joined: Sep 14, 2004 Posts: 6142 Location: Rural Virginia
Posted: Wed Mar 26, 2008 8:41 pm Post subject: Re: Let's talk about FDIC
Since about the time Bush borrowed more money than all previous presidents combined, I've considered the notion that the FDIC could actually bail out all US bank-account holders a fiction.
Is that BIF money really there? In what form? Is it real money or just data on a card?
How can a government that is already $10 trillion in debt make good on the massive claims a failure of the bank system would generate?
The taxpayers would have to pay for it, Dante? How could they? With the same money they were reimbursed after their banks went bust?
We are facing hyperinflation, my friends. Falling rates, a shrinking dollar, and vanishing confidence in the dollar will have to be met by ever-thicker blizzards of dollars.
The FDIC might be able to pay the claims, but in worthless dollars. _________________ "Actually, humans died out long ago."
---Abused, abandoned hunting dog
"Things have entered a stage where the only change that is possible is for things to get worse."
---Me and my brother
Posted: Wed Mar 26, 2008 8:58 pm Post subject: Re: Let's talk about FDIC
Heineken wrote:
Is that BIF money really there? In what form? Is it real money or just data on a card?
Well...sort of. They don't have 40 billion one dollar bills in a vault. What they have are Treasury Securities. The money is loaned out to the US treasury. That BIF pool though, is really just big enough to cover a minor string of bank failures like in the late 80's. It's pretty clear that even double that rate would pretty quickly bankrupt the BIF. _________________ "I was born in a deep forest
I wish I could live here all my life
I am made from stones and roots
My home, these woods and roads
All my life I loved this sound
Of the woods all around
Eagles fly where the winds blow free" -Korpiklaani
Joined: Apr 27, 2007 Posts: 4262 Location: The Great Sonoran Desert
Posted: Wed Mar 26, 2008 8:58 pm Post subject: Re: Let's talk about FDIC
DantesPeak wrote:
Quote:
The taxpayers would have to pay for it, Dante?
Technically, taxes won't be raised but the money should be borrowed because the Treasury is not authorzied to issue fiat money.
That's why the Fed was created to get around that restriction.
I suppose in the meltdown that may occur, all rules will be thrown away and fiat money or Fed credit will be issued to account holders.
JP Morgan to the rescue again...
Quote:
For JPMorgan Chase & Co., meanwhile, riding to the rescue marked a return to the company's roots.
In the late 19th and early 20th centuries, legendary financier John Pierpont Morgan patrolled Wall Street, using his firm's capital to stem financial panics and stabilize the nation's economy.
In 1893, he put together a syndicate that essentially bailed out the government by resupplying the Treasury's depleted gold reserves. During the stock market panic of 1907, he headed a group that directed the disposition of large government deposits, helping to save many banks from failure.
Morgan's role as a one-man fire brigade was largely supplanted by the creation of the Federal Reserve system in 1913, and his high profile made him a target at a time when the ruthless practices of Wall Street financiers were drawing sharp criticism from populist politicians and others. In 1920, when terrorists set off a massive bomb in the New York financial district, killing 38 people, the explosives-laden wagon was parked directly across the street from Morgan's headquarters at 23 Wall St.
Instead of JP Morgan coupons they will be called the Amero. _________________ "There must be a bogeyman; there always is, and it cannot be something as esoteric as "resource depletion." You can't go to war with that." Emersonbiggins
"... hope is a rotten-thighed whore" Niko Kazantzakis
I see the FDIC as the straw that breaks the camel's back. We're going to prop and print over the next year, but banks are going to start failing anyway. After failure of bank number 5 or 6 (depending on the size), it will all start to come apart. IMO, this will be the moment where we accelerate from inflation into hyperinflation, as we will be obliged to print money to rescue bank deposits. _________________ "For my part, whatever anguish of spirit it may cost, I am willing to know the whole truth; to know the worst and provide for it." --Patrick Henry
Joined: Sep 14, 2004 Posts: 6142 Location: Rural Virginia
Posted: Wed Mar 26, 2008 9:29 pm Post subject: Re: Let's talk about FDIC
smallpoxgirl wrote:
Heineken wrote:
Is that BIF money really there? In what form? Is it real money or just data on a card?
Well...sort of. They don't have 40 billion one dollar bills in a vault. What they have are Treasury Securities. The money is loaned out to the US treasury. That BIF pool though, is really just big enough to cover a minor string of bank failures like in the late 80's. It's pretty clear that even double that rate would pretty quickly bankrupt the BIF.
This is really the critical point, SPG. Well-said. _________________ "Actually, humans died out long ago."
---Abused, abandoned hunting dog
"Things have entered a stage where the only change that is possible is for things to get worse."
---Me and my brother
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