By Doug Gentry, on April 22nd, 2011
The Federal Deposit Insurance Corporation (FDIC) was created in 1933 as a depression-era effort to restore the public’s faith in banks and banking. The early years of the depression were marked by numerous bank failures and runs on even healthy banks. After taking office President Roosevelt declared a bank holiday to give regulators a chance to identify, close/merge/sell troubled banks and to stop a spiraling panic of depositors hearing about bank failures and running to their own bank to withdraw funds.
In my Principles of Macroeconomics class we have just been talking about money (in particular fiat money) and the importance of trust. As long as economic players trust that money will be valued by others we use it. The same kind of trust is important in banking. Our economy needs banks in order to attract deposits, which then allow borrowers to secure loans and invest or consume.
The FDIC is a type of insurance program for banks. Each bank is required to pay premiums to the FDIC. If that bank fails, then the bank’s depositors are protected and will get up to $250,000 from the FDIC. This protection made wary depositors in 1933 start returning their money to the banks, which in turn helped fuel the recovery.
 On NPR’s Morning Edition this morning, there was an interesting piece about workers hired by the FDIC in 2009 to help with the process of closing failed banks, securing the deposits and paying the depositors, and then selling the remaining assets of the bank. As of now there isn’t a transcript of the piece, but you can listen to it here.
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By Richard Daughty, on March 10th, 2010
People think that Addison Wiggin is just another talented, intelligent, pretty face who secretly thrills to hear people say things like, “You’re a lot better looking than The Mogambo! And younger and smarter, too!” but he is much, much more than that.
His story starts off that “The FDIC is even more broke than it was three months ago” to which most people rudely say, “Welcome to the club! Waddya think, we got some kind of picnic at the beach going on out here in the real world while you pretty-face hotshots talk about who is smarter and about some idiot named Mogambo who must be an idiot because otherwise he would not have such a stupid name!”
Mr. Wiggin goes on undaunted, perhaps buoyed by the knowledge that no matter what happens, he’ll still be better looking than The Mogambo. And smarter, too. And younger.
Maybe that’s why he did not seem to be registering horror at the news of the bankruptcy of the FDIC, and, as if to underscore my suspicions, you can almost hear the confidence in his voice as he explains, “The fund the FDIC uses to ‘insure’ your bank account went $20.9 billion in the red during the fourth quarter of 2009. That’s more than twice the deficit reported when the fund first entered negative territory in the previous quarter.”
Naturally, if these were the old days when the money supply was more-or-less constant, this would cause panic: “Our bank deposits are uninsured! Yikes! The Mogambo said we’d be wiped out and here it is, and he said to buy gold, silver and oil, and we didn’t, and now look at us! Oh, woe!”
But nowadays? Relax! We have a fiat currency that the Federal Reserve can, literally, create at will, at a stroke, all the money necessary to make sure that every Last Freaking Dollar (LFD) dollar in your account is fully protected against actual nominal loss; you had an electronic or paper buck, you will still have and electronic or paper buck!
Unfortunately (and you can tell there is a “catch” by the way the soundtrack suddenly turns gloomy and there seems to be the sound of somebody, in the distance, throwing up into a toilet) this huge, sustained increase in the money supply guarantees – guarantees! – that you will lose buying power in every one of your precious dollars, so you are kind of screwed, either way, when you stop and think about it, by Federal Reserve policies.
My Sensitive Mogambo Nose (SMN) detects (sniff, sniff, sniff!) detects panic. So, desperate for money, I look to prey on the superstitious, and suggest that maybe you should just send all of your “tainted” money to me so that my hoodlum friends and I can have a big ol’ party, where we will raise our glasses in a long series of toasts to you, to your health, and to your good luck because – hey! – attracting the attention of deities, paranormal powers, transcendental influences and cosmic forces could, conceivably, work!
Mr. Wiggin is not enthusiastic about my latest rip-off scam, which I suggest only because I am out of ideas and I am desperate for money. He suggests a perfectly legal and good way to get some money, which is, “As long as banks can continue to borrow from the Fed at 0.25% and park it in 10-year Treasuries for nearly 3.7% (and leverage it up, of course), we don’t see this changing”!
He’s right, of course, but before you rush out to start a bank and get your piece of this Federal Reserve stupidity, perhaps you should consider something along the lines of buying gold, silver and oil in some kind of wild, paranoid, knee-jerk reflex as a small, small part of a whole constellation of symptoms known collectively as Screaming Fear Of Outrage (SFOO) of the inflation that will be caused by such massive increases in the money supply, now additionally caused by the needs of the FDIC, but he goes on that it will get worse than that, as, “On top of that, the FDIC’s list of ‘problem banks’ grew during the fourth quarter from 552 to 702” he says! Yikes!
A long, haunting howl of dismay escapes my lips, perhaps not unlike the sound of ravenous, starving wolves howling, “oooOOOOOOooooooooh!” as they close in on your bloody trail as you crawl along, dressed in rags, wounded, bleeding, in the snow, at night, in the mountains, in a snow storm, with freezing sleet, and you realize that you can’t buy them off with your paper fiat money, but with a flash of True Mogambo Enlightenment (TME) that has come tragically too late, you realize that with the heft of a kilogram of gold in your hand, you can beat the living hell out of anything that comes near you that is metaphorically wolf-like in economic nature, or, with literal wolves, something spewing out .45 caliber bullets in a semi-auto fashion, putting us one more leg-up (as if we needed it!) on wolves of the literal kind, with politicians being of the metaphorical kind of ravenous wolves, thus mixing up literal with figurative, back and forth, up and down until you are in a panic, all confused and bewildered, wondering what’s real and what’s not, and your first instinct is to just start blasting, blasting, blasting until your trigger finger is bloody and cramped, and you manage to clear out a “Mogambo Dead Zone Of Safety (MDZOS)” all around you.
And you probably would have, too, if you had not remembered that you bought a lot of gold, silver and oil just to take care of situations like this! And it’s working perfectly! Ahhh!
But this thing about the “FDIC’s list of ‘problem banks’ grew during the fourth quarter from 552 to 702” is, as I notice with alarm, not only a number that is a huge (almost) 50% higher in just one quarter, a statistic which sets my Sensitive Mogambo Senses (SMS) tingling, as with two data points, a desperate-yet-handsome man like myself can quickly, and easily, discern some kind of Trend Of The Ugly Kind (TOTUK), to which I am particularly alert ever since I noticed that the entire freaking course of human history in the world, a world you call Earth, is the sad, stupid story of one stupid country after another borrowing money and getting into debt that they can’t repay, which is always resolved with inflation in prices, a bankruptcy of assets, and a ruinous war with somebody as we attempt to shift the cost of victim-hood from ourselves to foreigners so that there is, indeed, a free lunch for us.
Mr. Wiggin is not impressed with my penetrating analysis, which is in line with what everyone else agrees is pretty stupid and not worth reading or even admitting that they had even read, even in part, but I notice that he immediately takes up on my idea of “trend” that just I mentioned, and – surprise! – he finds, “Hmmm, let’s see. The number grew 27% in just one quarter. At this pace, every bank in the country will be on the problem list by the fourth quarter of 2012.”
An involuntary “Yikes!” escapes my lips. That’s a trend!
I, as are most normal people who understand how this “economics thing” works, am horrified by all of this, and the only saving graces were that I had gold, I had silver, I had oil, and I had enough firepower – within reach! – to provide calming relief to an otherwise paranoid, screaming, hysterical man, such as myself, pumping adrenaline from every pore in his primal outrage at the sheer terror that is being created by the Federal Reserve.
For some reason, I can actually feel your scorn, as you deride what you think is just another paranoid gold-bug gun nut Loonie-Tunes weirdo since the Federal Reserve can just create all the money and credit that the FDIC needs, so why don’t I, as I asked my kids, just shut up?
With that, I thought it was all over, until he went on, “Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942”, which was the year after we entered World War II, which seems important, but was a long time ago, and we don’t get to watch watching terrific war footage with things blowing up and – blam blam blam blam! – guns are firing! Things are on fire! It’s all exciting as hell!
Instead, we will note, much more soberly, that this is today we are talking about, not some ancient yesterday, and Americans are not the “good guys” bravely freeing Europe by destroying it all so that our industrial advantages are completely spared, but are, instead, the biggest bunch of feel-good, hyper-leftist morons that the world has ever seen where, despite a national emphasis on education, ample historical evidence, and the Constitution of the United States requiring that money be only of gold and silver, the citizens have allowed a pure fiat money and every kind of slimy flimflammery that such unbridled money supply would allow, which was, as you would guess, anything you could imagine.
The bad news is actually beyond that of mere bank lending being down, since nobody (except governments) wants to borrow money, since nobody has the money to buy anything anybody makes, so why invest money to make something that nobody will buy. The worse news is that bank lending is how money is created.
Money is, by definition, being destroyed, so that there is less money around with which to pay debts.
You know, without me telling you, that all this ain’t good! And these are the times when you are glad that you are safely invested in gold, silver and oil, and the only thing you have to worry about is, for instance, the usual stuff of keeping an eye out for party-killing suspicious strangers who may know your wife or boss, checking for suspicious pods growing near where you sleep, and protecting yourself against vampires, werewolves, and other blood-suckers, which leads us back to politicians deficit-spending, which leads us back to the Federal Reserve creating more money, which leads us back to buying gold, silver and oil in fearful response, which leads me back to, “Whee! This investing stuff is easy!”
Using Gold to Fend of the FDIC and Its “Problem Banks” originally appeared in the Daily Reckoning.
By Trace Mayer, on September 28th, 2009
Friday 25 September 2009 had two significant events. First, there was a full committee hearing on Ron Paul’s bill H.R. 1207 to audit the Federal Reserve. Second, Chief Judge Edith Jones of the United States Court of Appeals for the Fifth Circuit, directly under the United States Supreme Court and covers Florida, Georgia, Alabama, Mississippi, Lousiana and Texas, issued an order for a three judge panel to hear an issue brought about apportionment regarding the House of Representatives. Both of these actions, should they be brought to fruition, would seek to restore essential checks and balances found in the United States Constitution and reduce the centralization of power.
END THE FED
Murray Rothbard argues in The Case Against The Fed that because depositors are entitled to demand their deposits at any time and because by its nature fractional reserve banking cannot sustain all depositors demanding their deposits at the same time therefore fractional reserve banking is fraud.
Because of the inherently fraudulent nature of fractional reserve banking bank runs were a common occurrence before the FDIC and Federal Reserve system. However, because of the cartel nature of the FDIC and Federal Reserve system individual bank failures are no longer to be feared by depositors because of the implicit guarantees.
These implicit guarantees have been turned into actual guarantees with the $100k limit being increased to $250k, which returns to $100k on 1 January 2010, the FDIC’s reserve fund being depleted and the Treasury extending a $500B line of credit to help placate owner’s of $13T+ of FDIC insured funds.
This has introduced tremendous moral hazard. Moral hazard is the economic principle that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. As a result, people do more due diligence on the movies they watch than the banks they deposit their currency in.
For example, with FDIC insurance the moral hazard occurs often without conscious or malicious action. Depositors have been trained to seek out the highest yields without regard to the underlying stability of the bank because when there is a bank failure the losses are socialized through increased FDIC insurance premiums, inflated away by the Federal Reserve through increasing the currency supply or a myriad of other fraudulent, deceitful, immoral or often illegal means. The lynchpin of the current banking system, which is inherently unstable and will fail, is the Federal Reserve.
Consequently, the Federal Reserve is built on a fraud and the attendant effect on the rest of the economy is to distort normal market operations through both the supply and cost of currency. This is illegally and unconstitutionally perpetuated through legal tender laws which violate the Constitution in regards to the monetary provisions in Article 1 Sections 8 and 10, the 10th Amendment and confounded the definition of a dollar and serve to centralize power.
But this immoral system, conceived in iniquity under cloak and dagger as explained by G. Edward Griffin in The Creature From Jekyll Island, has been perpetuated for nearly 100 years and despite humanity doing just fine for thousands of years many cannot conceive of an economy should the Federal Reserve be razed. Nevertheless, because the system is built on fraud and because sunshine is the best disinfectant therefore the Federal Reserve has strongly challenged any type of public audit, accountability or oversight despite it being in the best interest of American citizens.
AUDIT THE FED
As the wretched vampire squid is dragged into the sunlight and revealed for the parasite it is then increased political pressure will be brought to bear on the immoral institution. Ron Paul’s bill, which received a full committee hearing, is the first major step in this direction in a long time.
During the hearing testimony was heard from both Austrian economist Tom Woods, author of Meltdown, and Scott Alvarez the general counsel for the Federal Reserve. As the general public becomes aware of the tremendous damage this institution and those on Wall Street have done hopefully they will adopt the spirit of the Founding Fathers.
Mr. Alvarez, or should we say Chicken Little, decides to terrorize those who advocate in favor of H.R. 1207. He testified:
These concerns likely would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation. … Higher long-term interest rates would further increase the burden of the national debt on current and future generations. Adoption of H.R. 1207 also could disrupt the nation’s relationships with foreign central banks and governments, relationships which are helpful in supporting the Federal Reserve’s efforts to fulfill its statutory missions, and erect barriers to official cooperation among central banks and governments. Foreign central banks and governments likely would be less willing to engage in financial transactions with the Federal Reserve if these transactions were subject to policy review by the GAO as H.R. 1207 would allow. These transactions, such as the deposit of international reserves and bilateral currency swap arrangements, help support the role of the dollar as the worldwide reserve currency
For example, first comes the audit of the Federal Reserve system. Next comes the legislation to end it. Then comes a reenactment of legislation like the Coinage Act of 1792 to prevent future similar behavior which reads:
SECTION 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, * * * every such officer or person who shall be guilty of any * * * of the said offenses, shall be deemed guilty of felony, and shall suffer death.
APPORTIONMENT
Bicameralism is the practice of having two legislative or parliamentary chambers. The United States Congress is modeled after the British system which was composed of the House of Lords and the House of Commons. The United States Senate is composed of 2 Senators from each state while the House of Representatives is under Article I Section 2 to be “chosen every second Year by the People of the several States”. Under the doctrine of apportionment the House is to grow as the population grows and it did for the first 130 years of the Republic except in 1840. But the Reapportionment Act of 1929 limited the size of the House to 435.
Currently, Congress Critters have a constituency of about 700,000 instead of about 50,000 like they did before the Reapportionment Act. This has served to consolidate power and make the Congress Critters less responsive to The People. The 17th Amendment was ratified in 1913, the same year the Federal Reserve Act was passed, and provided for the direct election of Senators. The eviseration of these two checks and balances in the American political machenirey has made it easier for special interests and lobbyists to influence elected officials.
With the House often gridlocked with 435 members imagine the chaos of getting everyone aligned if there were over 1,300? Ironically, increasing the number of Congress Critters through proper apportionment would likely have the effect of greatly decreasing the size of government because special interests would have much less influence and control with politicians likely much more accountable to their constituency. Therefore, I find this order by Judge Jones for a hearing on the apportionment issue to be extremely interesting and a positive development regarding the decentralization of power.
CONCLUSION
The auditing of the Federal Reserve system would be very beneficial for the powers of truth and justice. The Federal Reserve system should be viewed as counterfeiters because they enjoy a legalized counterfeiting franchise and are able to engage in creating new fiat currency with legal tender status and doing so amounts to confiscation through inflation which is a form of taxation without representation or due process of law. Unmasking these costumed terrorist counterfeiters will bring to light and the conscience of The People the degree to which they are being stolen from.
Likewise apportionment could result in Congress Critters being more responsive to their constituency who could demand the repeal of the Federal Reserve Act and the implementation of legislation like Section 19 of the Coinage Act of 1792. Humanity has survived and thrived for thousands of years without a Federal Reserve. Consequently, auditing and abolishing the Federal Reserve will be a great development for humanity and reduction in the centralization of power.
Disclosure: Long physical gold, silver and platinum and no position the problematic GLD or SLV ETFs.
By Trace Mayer, on September 21st, 2009
IS THE TREASURY OUT TO KILL MONEY MARKET FUNDS?
Tim Geithner, the Goldman Sachs Secretary of the Treasury, has gone on record as saying that the government will withdraw its $3 trillion backstop guarantee from the money market fund industry, on schedule, this September 18.
While I am for any reduction in the government’s role in the economy, this decision is pretty interesting. Why would they do it now, when even a cursory examination of the real economy shows that things are shaky and rocking the boat on investor confidence seems a bit of a gamble?
I will try to answer that question, but only after stepping back to 2008 when I was told by a friend of mine in the most rarified air of high finance that he and all his peers had pulled all their cash out of money market mutual funds in March of 2008. They had done so because of the large quantities of suspect paper littering the portfolios of the funds, much of it anchored to commercial real estate and syndicated portfolios of consumer loans.
As of mid-year 2008, 40% of outstanding corporate paper was held by money market mutual funds. The funds had taken on this paper as a way of trying to boost their yields and therefore gain a competitive advantage.
Another friend, an executive of a very large mutual fund company, confirmed that what lurked under the hood was ugly indeed.
In September of 2008, these concerns were made tangible when one of the largest U.S. money market funds, the Reserve MMF, “broke the buck.” Which is to say that the fund’s net asset value had fallen below the $1.00 benchmark that money market funds traditionally hold the line on. When the news broke, the public started heading to the exits, which is why the government had to step in with a deposit guarantee.
For the record, money market fund sponsors are under no real obligation to maintain a $1.00 NAV. Rather, that has become customary – a selling point, if you will – with the fund sponsors under no hard obligation to assure their NAVs don’t fall below that level. They hold the line at $1.00 because they know that it is very much in their interest – and the interest of their industry – to do so, even if that means they have to step up to the plate and provide the cash required to repair any holes in their balance sheets to avoid breaking the buck.
Interestingly, though breaking the buck is seen as something of a “black swan” event, it actually happens with great regularity. In fact, according to one study, over one-third of all money market funds have had their NAVs fall below $1.00 since July 2007. The only reason this news didn’t leak out to the public, causing the sort of run experienced by Reserve, was because the fund sponsors were able to quickly rush in with the necessary cash infusion.
Which brings us to September 18 and the expiration of the government’s guarantees.
While the money market funds have clearly reduced their exposure to the worst sort of paper, a fact you can see in the steep downward slope of their yields over the last couple of years – the higher the risk, the higher the yields – they are still sitting on huge chunks of risky paper.
Glance at the prospectus of your favorite money market fund, and you might find, as I just did by looking at that of one of the world’s largest money market funds, that 38% of the portfolio is made up of CDs issued by foreign banks, 9.9% in short-term corporate paper, and 12.3% in medium-term paper, much of it hitched to the fates of portfolios of car loans, insurance companies, and a variety of corporate entities.
In exchange for taking on that risk, you would have earned, so far in 2009, a yield of 0.55% on your money. Yes, just a hair over half of one percent. Of course, out of that handsome return, you’d have to pay your taxes, cutting the return well below even today’s purportedly reduced inflation levels.
As of September 2009, there was $3.58 trillion in money market mutual funds, of which just shy of $2 trillion is sitting in taxable non-government funds. But that money is starting to move: over the last month, money market mutual fund redemptions have been on the rise – with assets falling by a significant 15.3%. With the government pulling its guarantee, and given the risk associated with the money market funds, I have to wonder how many more investors might also decide to pick up stakes in the days and weeks just ahead?
And where might all that money head? Most likely, given the cautious nature of money market fund holders, into FDIC-insured accounts and CDs, and into Treasury funds and instruments. That, of course, helps the banks, and it helps the government meet its aggressive funding needs, while simultaneously taking pressure off interest rates.
All of which may explain why the Treasury is pulling the plug on its money market fund guarantees. And, perhaps, in the process pulling the plug on the non-government money market funds.
If you are aware of a money market fund sponsor that relies on its non-government money market funds for a sizable percentage of its income, it might make for an attractive shorting candidate.
Finally, I have a question for those of you who are parking money in taxable money market funds at this point, especially those that are not invested in Treasuries. And the question is this, “Are you out of your mind?”
Recognizing big, emerging trends in the economy and in the markets – and getting in ahead of the crowd – is how smart investors can profit even in times of crisis. And that’s what The Casey Report focuses on, whether it’s shorting a bond insurer standing squarely in the way of the economic avalanche or buying into grains before their prices shoot up. One of our current favorites is a play on rising interest rates, a trend that is already baked in the cake. Click here to learn more.
[Editor's Note: Due to unnecessary risk for inadequate reward on Wednesday 16 September 2009 I closed my PayPal money market fund which was yielding a whopping 0.05% APY. Mr. Galland of Casey Research elucidates the reasoning behind this decision very well. In addition to just holding the FRN$ balances over the last few months I have also been moving into gold, silver and platinum and I am sure most of you know how to buy silver, etc. but this is especially important with silver trending towards backwardation. As the liquidity in money market funds evaporates this could put further pressure and perhaps hasten the coming market crash. Make sure your capital is safe and liquid.]
By Trace Mayer, on August 28th, 2009
Interview With Jim Willie
An interview with Jim Willie where we discuss the potential of bank failures emanating from the Middle East and rippling throughout the world being the catalyst for the next round of the credit contraction.
TRACE MAYER: Hey this is Trace Mayer and you’re listening to the 50th episode of the RunToGold.com podcast (mp3)and today I’ve got a special guest with me – Jim Willie from GoldenJackass.com. Hi Jim!
JIM WILLIE: Hi, good to be here.
ENEMIES AT THE GATE
TM: Yeah, good to have you with me. I know we communicate every now and then about lot of the very important things. And you have just posted a really important article about five minutes ago. Can you give us a brief overview about what this article is about?
JW: Sure. The article is entitled “U.S. Bank Enemies at the Gate“, I wanted to take off on that wonderful title about the Siege of Stalingrad, but you know there’s a lot of attention, Trace, that US Banks are doing this and interest rates kept low, liquidity is strong and blah, blah, blah. And what they’re missing is that foreigners have their own agenda. They have their own bank failures. They have their own failed construction projects and their own failed-nations if you will, like Spain. I think we may see a threat to the U.S. banking system come from outside. Like for instance Persian Gulf bank failures just span across the United Arab Emirates and Kuwait and Saudi Arabia and before you know it – London and New York, so maybe there is a threat outside and we have got too much attention on the inside.
TM: Yes. Because we are seeing really high inflation rates in many middle eastern countries and they are also engaging in their own type of bailouts and stimulus packages, although they might be named differently. And so you are thinking that we may see perhaps a major bank failure come out of the middle east which will affect one of our large London or New York banks?
JW: Yeah. What I am hearing that the Dubai construction projects with all the pictures of magnificent bridges and unbelievable architecture for high rise buildings may look good but are failing at an unbelievable rate – the construction boom has turned into a magnificent bust and the bailouts have come from Abu Dhabi, the financial center, is like the London of the entire Persian Gulf. So, they are bailing out these construction firms, billions are changing hands, and the currency of choice that is being loaded up on all kinds of balance sheets is Treasury Bonds. So they will start liquidating and they have already begun this and if they continue the liquidation process then we are likely to see more bank failures just from lower values.
And you know, they have to deal with their own reality. They do not have a Plunge Protection Team there, they do not have phony stress tests there, they do not have phony accounting standards board. I go into more details in the article and even more detail in my August Hat Trick Letter member’s only which is a great source of information.
There is a lot of stinking stuff coming down the pipe and if we see some bank failures string across the Persian Gulf then there is no way it does not reach London and New York because they own a lot of bank stocks for the giant U.S. Banks. Now, there is a threat that you are just not catching in the financial networks in the U.S.
FAILED REAL ESTATE
TM: Right. Interest rates regulate production over time. By keeping the interest rates artificially low, we stimulated this huge commercial real estate bubble here in the U.S., but if we think the US commercial real estate bubble is a mess then just look at what has happened in Dubai. They built all this commercial real estate and what underlying economy do they have in Dubai; sand. There is no real underlying economy there to support any of these loans on the bank’s balance sheets.
So now they have built all these giant skyscrapers that are all like white elephants of dehydrating debt in the dessert. There are these huge buildings and they are all completely empty; are they not? Of course we are going see many bank failures coming out of Dubai. Do you think that is going to start impacting the U.S. banks here because like Prince Alwaleed, a big shareholder in Citigroup, for example might want some New York banks to subsidize these failed projects with bailout fund?
JW: Well, I think that could be the sequence that happens and there are a lot of unknowns. There is one particular construction project that I think of all the time when somebody says, “Oh, the big Dubai construction boom”. Well, there is a big property with all kinds of housing and it is laid out from shaped like a big palm tree. If you are looking down from 5,000 feet it is a beautiful, beautiful thing.
What I have heard is that it is entirely empty. It has failed with no income stream. Now, I would like to just to make a quick point here and it is not like their economies are based on processing sand. They have an oil industry and a petro-chemical industry. They make refined gasoline, chemical products, have feed stock, crude oil and natural gas.
Saudi Arabia actually has the most diversified economy in the Persian Gulf. I do not think they make their own pharmaceutical aspirin pills or razor blades or soap but maybe some. But as for other Persian Gulf nation like Kuwait, U.A.E. and Bahrain, they do not have a diversified economy but they do have a petro-chemical industry and that is it. Banks and Petro-chemical.
So, beware of the threat from the back door where you have some bank failures as this is not just a liquidation of Treasury Bonds, I am talking about bank failures – large, large Persian Gulf banks that go bust and as a result there is a vast liquidation that takes place which ripples into New York and London. That is what I think could happen.
TM: Yeah, and then we see the next round of this credit contraction start because, as you know, we had the first shocks last year and we had a little bit of shaking and we saw couple of buildings go down – Lehman Brothers and AIG, but as I have written about in my book The Great Credit Contraction, which you like, is that this is just getting started. And we are seeing the collapse of a multiple centuries old monetary system. We are in for the next round and I would not be surprised if we do see the next shock-waves emanate from the Middle East.
FDIC FAILURE
JW: But we are getting shock-waves that happen from the inside too, Trace. Look at the FDIC today. FDIC came out and says four hundred and sixteen troubled banks, well try a thousand.
TM: Or four thousand!
JW: And their fund is dead, so they raised some fees earlier this year on member banks within the system. But they are going to have to raise it again and the bank industry has said this will reduce earnings and it is going to reduce liquidity which decreases their ability to lend. So, the FDIC itself is going to be a wet blanket on the banking industry even if they appeal to Congress for the increased funds and that is going to cause the insolvency of more banks and add pressure to the U.S. government and the Dollar. So the threat is outside the gate.
The point my article is that we have got many threats inside the economy and I agree with you completely-we are about to the second round of the monetary banking credit crisis. Perhaps September or October, probably September, but there are a lot of factors that point to the next few weeks. The FDIC announcement may be one of those factors. The summer vacation is another, they have to increase the Federal Debt limit beyond $12.1 trillion and look for Congress to come back with an attitude of responsibility when they cannot afford to stop the printing press. So, we a lot of factors coming in right now.
WHAT TO DO
TM: And so, what do people do, obviously my site RunToGold, I like the monetary metals – Gold, Silver, Platinum – what do you suggest people do, to protect themselves and to protect their capital?
JW: Well, on a smaller scale, if you only have a few thousand dollars that you want to protect, and you are not huge saver from the last twenty years from your career then I would suggest getting some gold coins or silver coins. But I would avoid the century old, you know, like the Morgan Silver Dollars. But you do not want to be buying fifty thousand dollar coins. You want bullion coins like the Silver Eagle, Kruggerand, Mable Leafs, Gold Eagles, etc. Get the standard coins because you get a lot more bullion for the price. But I do not think buying $150,000 worth of coins makes too much practical sense. You have to store them.
I believe that GoldMoney as you do, is a fine institutions, and there are others like the BullionVault, etc, but I like GoldMoney because of the way it is run and the payment features that they have.
I recommend buying gold and silver bullion bars whether 1 kilogram, 5 kilograms, 10 kilograms and etc. The real lesson that we are seeing in this credit contraction, economic failure and banks system insolvency is that because for a full generation the money has been been paper and now what survives will be not paper. It will be the metal.
ILLUSORY CURRENCY
TM: Yes. And in most cases, it is not even paper that is the currency supply but just little digits on a hard drive which is even less real than paper. We might even see a rush to the physical paper notes before we see a rush from the physical paper into the physical metal.
JW: The electronic money trade makes not only possible paper counterfeit but electronic counterfeit and where you can have computer programs counterfeiting your bonds, I mean imagine, this is why we have got trillion dollar frauds. One of the points I make in this article is something that Karl Deninger said that we need a new resolution trust corporation. But that is totally of the mark. We are never going to see it because because many properties are tied to different mortgage bonds and the fraud. And you cannot have an RTC if they go and buy a mortgage bond and then they have got to pay it out three times. It will not make any money and so there will not be a new RTC. You are going to have a top down solution with more and more fraud like TARP solutions, etc.
CONCLUSION
TM: Well good interview. I know that we are pretty short on time so I would like to thank you for coming on and sharing a little bit with our RunToGold.com listeners. Once again, you have been listening to Jim Willie of the GoldenJackass.com and thanks Jim.
JW: It has been my pleasure and watch this case that is likely its going to go the Supreme Court where the Federal Reserve is going to defend itself against the Freedom of Information Act. It is going to be the private Wall Street Syndicate versus the People. This will be quite interesting.
TM NOTE: Be sure to pre-order a copy of End The Fed by Ron Paul which debuts on 16 September 2009 and help Raze The Fed. With enough pre-orders it will make its appearance as #1 on Amazon and perhaps be a bestseller on the New York Times list which will cause even more pain for the Federal Reserve and Tim ‘tax cheat’ Geithner regarding House Resolution 1207. He was extremely uncomfortable in his Digg.com interview with the Wall Street Journal.
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By J.D. Seagraves, on February 24th, 2009
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.” LewRockwell.com 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.
By Tamera Daun, on December 4th, 2008
Sheila Bair keeps speaking out, and certainly deserves respect as a clear-thinker in these abominable economic times. Bair reiterates the same message week after week, although most likely the cause of a few ‘Paulson & Co’ migraines.
Bair understands something that most taxpayers could have told Paulson a long time ago. While the Treasury busily attempts to avoid what Paulson describes as ’systemic crash-and-burn’, force lenders to lend, and calm investor panic, Sheila knows that troubled taxpayers can neither borrow, nor spend more.
FDIC Chairwoman Bair is an advocate for mortgage modification. She supports steering the helm of mortgages in serious payment delinquency. She proposes modifying them to a 38% cap on income, daring all the way down to 31% of earned income if necessary. In addition, she proposes lowering interest rates on mortgages, and increasing payment time.
Bair emphasizes that in calculating new mortgages, FICO scores will not be considered. It is a beacon of light for all those worry-deep in credit debt. Any modifications will be based solely on the earned, actual income of households.
The bad news is that it is currently too late for many already in the foreclosure line. The good news, however, is that her proposal can save so many more from heading down the same path. Healthy family finances, means greater consumer spending. Isn’t this what Paulson also hoped for? Go figure.
Far from everyone is headed for foreclosure, however, the numbers are not only disturbing, they are an important indicator. We can only imagine the unknown number of subprime households teetering on the edge of one or two delinquent payments.
Sheila Bair provides a necessary solution to the core problem. The second part of the solution needs to come from an Obama investment in immediate job creation, minimizing longterm effects of a lengthy unemployment line. These two solutions would allow the grassroots to once more grow, and the corporate world could restructure their way back to health and viability.
Thumbs up for Sheila Bair.
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By G.L.C., on September 23rd, 2008
In 1932, Congress created the Federal Home Loan Banks to prop up thrift institutions during the Great Depression. Today, there are 12 regional Federal Home Loan Banks. Their main business is low cost loans to their more than 8000 owners, which include commercial banks, thrifts, credit unions, and insurance companies. Like Freddie Mac and Fannie Mae, they are also Government Sponsored Enterprises, entities owned by private shareholders but chartered by Congress to perform a public mission. This special status enables them to borrow inexpensively on the bond market. Because of their special status, investors assume that the federal government would bail them out of any crisis.
The 12 regional Federal Home Loan Banks are among the world’s largest borrowers. They have about $1.3 trillion of debt outstanding. Ever since they have taken on a bigger role in funding banks and thrifts, their debt has ballooned 34% since the end of 2006 mainly because the credit crisis dried up other sources of funds for banks and thrifts.
The present credit crisis has already compelled the federal government to take over Freddie Mac and Fannie Mae. Many are now wondering if the federal government will eventually have to bail out the Federal Home Loan Banks as well. The Federal Housing Finance Agency, which overseas these home loan banks and acts as their regulator, is confident that the federal government will not have to step in.
Another worrying factor is that some shaky firms like IndyMac Bancorp, Inc., which was seized by regulators in July, also received advances from these home loan banks. But these advances are backed by collateral. When a bank fails, home loan banks have priority over other creditors, including the Federal Deposit Insurance Corporation.
Many experts have always criticized the concept of Government Sponsored Enterprise and called them flawed and unviable. The federal takeover of Freddie Mac and Fannie Mae have only strengthened this argument. Many are predicting that the Federal Home Loan Banks could be next. But it might just remain predictions.
Unlike Freddie Mac and Fannie Mae, the Federal Home Loan Banks have managed to remain profitable despite the present crisis. Their reported combined net income for the second quarter of the year is $718 million. This is a 14% increase from the figure for the same period last year.
But there are warning signs. One of them: the Federal Home Loan Bank of Chicago reported a loss of $152 million for the first half of the year. The loss was caused partly by hedging costs-related interest rate risks on mortgage investments. But the Chicago bank can take heart from the fact that another home loan bank – the Seattle Home Loan Bank – suffered a $9.1 million loss in the last quarter of 2005 but has since returned to the black. The loss in 2005 was also caused by mortgage investments.
These banks do not have publicly traded shares. Only the members or customers own shares in these banks, and these shares change hands only at face value.
By Evelyn Black, on August 29th, 2008
On August 26, the Federal Deposit Insurance Corporation increased the number of banks it considers in danger of failure from 90 to 117 and responded indirectly to concerns about its ability to insure money on deposit at retail banking institutions. The FDIC is considering increasing the fee it charges retail banks to insure their deposits to 14 cents for every 100 dollars of insured deposit money this October. A serious fight from the banking industry is expected since banks are already struggling to survive. The fee increase could not come at a worse time for them, and yet without functional FDIC deposit insurance, bank runs become all too likely all over again.
In the immediate aftermath of the recent failure of IndyMac Bank in California, FDIC officials were all over the media assuring a skittish public that the situation was well in hand and that the number of banks on the troubled list is actually lower than it was in the 1990s. What was not said, possibly because it defeated the whole point of going on TV to reassure the public, was that the size and scope of the banks currently facing failure is far beyond anything the FDIC has had to face since the Depression.
IndyMac was the third largest bank failure in history, and it is but one of a large number of major regional banks that are currently struggling to stay above water. Earnings at banks and thrifts declined a whopping 86% from April to June and are currently down to $4.96 billion from $36.8 billion only a year earlier. At the same time, the credit crisis appears to be spreading to lending products that were not really of concern only six months to a year ago. Credit cards, auto loans, and other types of retail consumer debt are beginning to go into default a higher and higher rates, and already institutions are experiencing a rapid increase in late payments.
Small business credit lines, which insure the smooth operation of daily life in many cities, are already getting much tighter as underwriting departments react to a steady drop in the value of business capital due to the housing crisis. While it is true that more homes sold this July than expected, the drop in housing values for June was the largest on record. Many of those sales were “short sales” on foreclosures.
As home prices continue to plummet, both personal and small business customers have fewer and fewer options for securing needed credit. Already many homeowners are “upside down” on their mortgages; that is, they own more on their homes than their homes are currently worth. When this happens to customers who have home equity lines at retail banks, the lines are frozen and credit is no longer available.
Sadly, many customers are tapping their unsecured credit cards to fill the gap and are consequently having a harder and harder time managing those payments now too. The high cost of gasoline and the rise in foreclosures has also resulted in an increase in voluntary defaults on auto loans. Banks don’t really want or need a wave of people calling in to “give back” their SUVs right now since, with gasoline still closer to $4 a gallon than $3, those vehicles are incredibly hard to sell at any price.
Many analysts fear a second huge waive of defaults on credit cards, HELOCs, and auto loans that will hit banks harder than they can stand to be hit right now. The FDIC currently provides up to $100,000 per customer in insurance for checking and savings accounts and up to $200,000 for married couples, per financial institution. However, much of that promise depends on the FDIC never having to actually deliver on that promise in a truly huge way.
Even in the wake of the single IndyMac failure, some multinational banks were refusing to cash checks issued by the FDIC on IndyMac acccounts, putting extensive holds on the deposited items or refusing them altogether, hoping to shuffle these customers off to another bank before anything went to court. It’s hard to imagine the chaos that might be caused by multiple simultaneous bank failures, so we don’t see a lot of open discussion about that possibility.
That lack of discussion doesn’t mean the possibility isn’t out there, it just means the topic of simultaneous multiple bank failures has become “the elephant in the living room.” Banks, federal regulators, and some customers see the danger quite clearly, but no one knows quite what to do about it. Add to that the concern about not causing panic and you have a truly uncomfortable situation for all concerned.
The financial crisis that has gripped the U.S. since last November as the subprime loan mess began to hit full force has been like that all along: a series of choices between difficult options both of which might have major negative consequences. For example, when the Fed cut the interest rate for the funds banks lend each other daily from from 5.25% to 2% over the course of less than a year, it probably saved credit markets from freezing up completely. On the other hand, it almost certainly fueled inflation, which is now at record levels.
If the FDIC draws undue attention to itself by increasing the fee it charges retail banks to insure their customers’ deposits, it will almost surely provoke the very reaction it wants to avoid: runs on the most troubled banks. If the FDIC does not increase this fee, it risks having inadequate resources to actually provide the money for the insured deposits should more banks fail. That’s a devil versus the deep blue sea sort of decision, and right now, there’s really no avoiding it.
The year 2009 promises to be as difficult, if not more difficult, for retail banks and the Federal Reserve as the year 2008 was. At the bottom of the whole mess is a lot of American consumer debt, a huge tremendous amount of debt, much of it probably bad debt, that no one is quite sure how to manage. The economy can’t recover without spending, people can’t spend without credit, and banks really can’t afford to extend any more credit given the current economic conditions.
That’s a recipe for disaster (for the banks at least), but in the long run, if it provokes a broader discussion of debt and the American consumer lifestyle, it might not be such a bad thing. This mess didn’t create itself: a lot of bad decisions at the level of individual people and banks themselves got us into this. I don’t think we can really get out of it without a long, hard discussion of those bad decisions and how to avoid them in the American’s economic future.
In the meantime, if you still have unsecured credit available to you, you may want to pay it down or off as soon as possible. Already major banks are slashing credit limits even on good customers in anticipation of further problems. If you have $5000 charged on a card with a $10,000 limit and your limit is reduced suddenly to $5100, your credit score instantly plummets, making it harder for you to get a mortgage or conventional secured loan.
All of which puts the banks into one of those lose/lose situations too: reduce unsecured lending and banks reduce credit card losses but also credit card profits, right at a time when profit is dropping like an SUV off a Minneapolis bridge.
One last thought: if you’re losing your house, now might not be the best time to sleep under a bridge either.
By Evelyn Black, on July 29th, 2008
Not too long ago, I confess I was in a rather panicked state of mind about the economy. This was after Bear Stearns tanked but before IndyMac was seized by the FDIC. I thought that if the U.S. government could intervene in a big way and refinance homeowners who were facing foreclosure, then the free fall in housing values could be stopped and the economy could be stabilized.
Now that a housing rescue bill is about to be signed by the president, I’m not so sure.
The bill contains a variety of features, including incentives for first time home buyers and the now infamous Freddie and Fannie bailout. However, the part of the bill meant to help families facing foreclosure will only apply to a small portion of homeowners.
Certain requirements must be met in order for a borrower to be eligible for the program. First, the borrower must live in the home. Second, the mortgage has to be at least 31% of the borrower’s gross monthly income. Third, the borrower’s income must be verified even if the initial mortgage was a ’stated income’ mortgage that required no verification. Fourth, the mortgage company or bank that made the initial loan must agree to a refinance at no more that 90% of the home’s current value.
In other words, the bank holding the mortgage has to agree to take a loss or the whole deal is off.
We don’t really know if lenders will agree to this last requirement. A loss of 10% doesn’t sound that bad on the surface, but the terms are 90% of the home’s current value. In some parts of the U.S. where the housing bubble was especially out-of-control, home values have already dropped by as much as 30%, so if a buyer has a 100% “creative” sub-prime loan on a property like that, the lender will have to agree to a 40% loss. Thus far, lenders have not been anxious to rework loans or agree to short sales on homes facing foreclosure. It’s hard to know why they would be motivated to do so now.
Other terms are also problematic. If a borrower makes $32,000 a year, the mortgage payment on the soon-to-be-foreclosed property would have to be in excess of $826 a month in order for the borrower to qualify. That will cut out a lot of people in trouble on their loans. So will the income verification requirements. While it is certainly sound and sensible to require verification, chances are good that if the buyer couldn’t produce it for the original loan or couldn’t get a loan with proper income verification, that buyer won’t be able to get the refinance either.
Estimates on the total number of foreclosures expected within the coming year range from three to five million. Say the lower number is correct. That means the help this bill provides is a possibility for about 13% of the homeowners currently facing foreclosure. And of those 13%, only the ones who can get their original lender to accept a loss of anywhere from 10-40% will be successful.
That’s not very encouraging.
Before Bear Stearns failed, Benjamin Bernanke was asked about how to stabilize the housing market, and he made a suggestion that he said he knew would never be taken but he thought might work. His suggestion was that each original lenders rework the loans made during the housing bubble so that the loans were more in line with the property’s current actual value; that is, that each lender take a loss by reducing the principal on the loans. That would immediately make the loans good: the property value would match the loan against it. He knew however, that lending institutions would be loathe to do this.
Again and again we come back to this issue of lender responsibility. We all know that individual people can and do make terrible financial decisions. Faced with the prospect of rapidly inflating home values, lots of people jumped into loans that didn’t make sense on properties they really couldn’t afford, hoping it would all work out over the long haul as their homes grew more and more valuable.
Financial institutions however have a fiduciary responsibility to themselves and their customers to be smarter than that and to take the long view. We all know now that they did not do anything remotely close to that. In fact, not only were too many sub-prime “creative” loans made, they were then repackaged and sold as rock solid securities in ways that spread the contagion throughout the entire financial system.
Looking back, I think Bernanke had it right the first time: the correction should occur at the initial lending institution, and if it goes down as a result, so be it. That’s the market at work, right? Doing what it does best, killing off the weak and the poor decision makers. What we have now is the government stepping in to offer tepid help to a very few and attempting to back private bad debt with public bad debt.
The bailout portion of the bill is fodder for another post.
By even the most conservative reckoning, housing values still have a long way to fall before the market stabilizes. Many are putting that bottoming-out somewhere around 2010 or even beyond. In the worst case scenario, home values drop so precipitously that even “good” loans go upside down (that is, the borrowers suddenly owe more than the home is worth) and Fannie and Freddie have to actually start tapping Uncle Sam for cash to stay solvent.
If that happens, the terms of the rest of the bill won’t really matter anymore.
I think the bill can work if it isn’t used. That’s a weird place to be, and not a comfortable one.
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