When The FDIC Says Not To Worry – It’s Time To Worry

The FDIC has deemed it necessary to publicly proclaim to that there is no “safer place in the world for your money” than an FDIC insured account.

“No Safer Place In The World For Your Money”

As bank failures are in the news, the FDIC is reminding consumers that our financial resources run deep and that their insured deposits are fully protected.

“Depositors should understand that the chances of their bank failing are low, and even if their bank does fail, depositors have nothing to worry about,” said FDIC Chairman Sheila C. Bair. “The FDIC fully guarantees their insured deposits and provides them with seamless access to their money. For the insured depositor, a bank failure is a non-event.”

As Chairman Bair also has said, “The American people can rest comfortably knowing that their FDIC-insured deposits are 100 percent safe. In fact, there’s no safer place in the world for their checking, savings or retirement money.”

The FDIC  states that it is impossible for an insured depositor to ever lose money due to the following:

  • All FDIC insured deposits are backed by “the full faith and credit” of the United States government.    Therefore,  according to the FDIC Chairman Bair, “we cannot run out of money“.
  • The FDIC has the authority to borrow as much as $500 billion from the US Treasury to protect depositors from large scale banking failures.   As previously stated, the FDIC Chairman does not foresee a need to tap the public treasury and expects the cost of banking failures to be covered by banking industry assessments.
  • The law requires that depositors of failed banks be paid “as soon as possible” the amount of their deposits plus accrued interest.  Exactly what “as soon as possible” means remains undefined.
  • To make the point perfectly clear for those who may have doubts about the “rock solid” FDIC, Chairman Bair  proclaimed in a table pounding manner that “No depositor has ever lost a penny of insured deposits – and none ever will…Our resources are strong.  Your insured deposits are absolutely safe.”

Sorry Sheila Bair, Life Is Not That Certain And Major Risks Exist

The harsh reality of the FDIC’s unusual statement is that IF the FDIC was “rock solid” financially and IF the public had no concerns about their deposits, there would be no need for the FDIC to say anything.  The fact that the FDIC felt compelled to issue such a strongly worded message indicates that the FDIC is concerned about depositor’s confidence in both the FDIC and the banking industry.

To proclaim that the FDIC “cannot run out of money” is self serving at best – the reality is that the FDIC has already run out of money and in all probability will need to turn to the Treasury for a taxpayer bailout as bank failures increase.  How many more bailouts can the overburdened taxpayers of this country survive as incomes continue to decrease and unemployment continues to increase?  Sorry Sheila Bair, the “full faith and credit” of the US Government ultimately relies upon its ability to tax productive income earning taxpayers who are already overburdened and near the breaking point.  This point is not lost on our foreign creditors such as the Chinese who have already expressed severe doubts about the US Government’s ability to service its debts.

Confidence Has Not Been Restored

The well publicized woes of the banking industry are continuing to erode public confidence which will not be restored by FDIC rhetoric.   The financial system in 2008 came perilously close to a total implosion, saved only by a flood of liquidity from central banks, massive expansion of public debt and blatant creation of money via the printing press  (politely referred to as monetization).

Governments and central banks worldwide used every measure and resource at their disposal to prevent financial Armageddon and prop up the financial system.  The financial meltdown caused by debt defaults and asset depreciation have been papered over by an ocean of currency but the central problem of excessive debt has not been cured.  In fact, the situation remains bleak as unserviceable debts continue to default and asset values continue to erode – not exactly a comforting situation for the banking industry.  The question that must keep government officials and central bankers awake at night is, do we have the resources left to adequately respond to the next black swan event?

Can The Next Financial Crisis Be Contained?

A major negative geopolitical or macroeconomic event could be the spark that tips the system back into a worse state of panic than we experienced in 2008.   After spending untold trillions to patch the system back together, will governments be able to borrow and spend to an even greater extent than they already have?  Many governments worldwide already have reached the practical limits of debt expansion.  The price of credit default swaps (CDS) is soaring on the debt of many sovereign nations.  There is a growing lack of confidence in the paper currencies of over indebted nations.

No one knows what the trigger will be for the next economic earthquake.   The major risk in the next financial crisis may be the inability of governments and central banks to adequately respond to and contain a financial panic before it leads to a global financial meltdown.

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