Is Your Money Really Safe with FDIC?

One of the most draconian and counterproductive interventions of the New Deal was the Glass-Steagall Act of 1933. Not only did it effectively end the gold standard and establish a fascistic regulatory environment that undermined the global competitiveness of the U.S. banking industry, it also established the sham known as the FDIC (Federal Deposit Insurance Corporation). Although most of Glass-Steagall were repealed in 1987, the FDIC remains—for now, at least. The good news is that the FDIC, like the entire banking system it allegedly insures, may be on its deathbed.

What is the FDIC?

Before we can explore why the FDIC is so bad, we must first understand what exactly it is. Most people are familiar with the FDIC’s supposed “insurance” of bank deposits up to $100,000 per account. This number was actually raised to $250,000 recently, in a typically asinine move by the political establishment to make bank accounts “more secure.” In reality, of course, raising the cap made accounts less secure, but depositor wealth has never been safe since the passage of the Federal Reserve Act in 1913 anyway. After all, it doesn’t take a genius to figure out that you can “game the system” by putting exactly $250,000 in any number of separate accounts, and a loophole that huge is typically indicative of a sham system—and that’s exactly what the FDIC is.

Why? Because banks are required to deposit just a tiny fraction of customer deposits into the FDIC fund. Since fractional-reserve banking makes every bank technically insolvent, it doesn’t take much for a bank to lack the physical funds necessary to redeem demand deposits. Each time a customer deposits $10 in his checking account, a bank can lend up to $9 of that money—effectively creating it out of thin air. What happens when the customer writes a $10 check and the borrower who was lent the $9 defaults on his loan? The FDIC doesn’t have even close to enough money to cover widespread defaults and bank runs.

The FDIC’s Books

How much does the FDIC have? About $35 billion. What is the total value of all FDIC-insured accounts? About $8.8 trillion, or over 250 times the size of the FDIC insurance fund.

The takeaway from this is that your money is not safe—the FDIC is a joke. Its purpose is political, to give cover to the legalized counterfeiting of the Federal Reserve. Bank customers are given a false sense of security that there is a “fund” somewhere that insures them against bank failure, when in reality, that fund can only cover a couple of small bank failures a year. If bank failure becomes an epidemic, then it will be the Fed that will make good on customer deposits—by firing up the printing press. Sure, you’ll get every last dollar of your deposit (up to $250,000) back, but the purchasing power of each of those greenbacks will be lessened by the Fed’s monetary expansion. Inflation, of course, is the Fed’s day-to-day business.

Could there really be a nationwide run on the Federal Reserve System and its member banks? Sure, there could be. A handful of bank runs typically produces a domino effect, which is why FDR needed to declare a “bank holiday” in 1933 as a precursor to Glass-Steagall. But setting that aside for a moment, the fact is that it wouldn’t—or should I say won’t—take too many bank failures to totally bankrupt the FDIC.

It Won’t Take Much to Break the Bank

In 2008, there were twenty-five bank failures. The FDIC itself now lists 117 banks as “troubled.” blogger Chris Brunner estimates the number of “vulnerable” banks at 424, with 95 “in very serious danger of collapse.” But going back to the FDIC’s own list of 117  troubled banks, Brunner estimates their total insured deposits to be $76 billion, or more than twice the FDIC’s entire insurance fund of $35 billion.

Fractional-reserve banking is an inherently bankrupt system. It allows a bank to lend $9 for every $10 it has on deposit. The borrower can then deposit his $9 check with a second bank, which can then lend $8.10 of it, etc. Each time the bank issues a fractional-reserve loan, it is effectively creating new money out of thin air. Ultimately, as much as $90 can be created for every $10 on deposit in the banking system.

The Federal Reserve Act established a system whereby this process of counterfeiting would be legalized and controlled. Once the dollar’s last remaining ties to gold were severed in 1971, the writing was on the wall. The chickens are finally coming home to roost: the dollar is going to zero, and there’s nothing the sham known as the FDIC can do about it.

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