It is funny that we are not hearing about this on the evening news or CNBC, but nothing really surprises me anymore. Those who read my work regularly know I speculated that the FDIC was basically broke, well, today they announced just that. As of September 30th, tomorrow, the FDIC is broke. This is why they are trying to raise money through making banks pay 3 years worth of premiums all at once.
Considering there are 416 banks on the FDIC “troubled” list I am sure we will see tens of billions more in failures. This leads me to believe that even the amount of money that the FDIC raises from its member banks will probably not be enough to cover the additional losses it will suffer. One also has to remember the infamous loss-share agreements which mean the acquiring bank has relatively no risk when it takes a failed bank over. I am sure these loss-share agreements will cost way more than the FDIC expects.
There is also the issue of the debt ceiling that we have to deal with as well. If we raise the debt ceiling we condemn our children and grandchildren to a life of indebtedness and if we do not we have to suffer the pain, I can handle the pain, can you? The economy is not getting better which also means another stimulus package is on its way as well, which is adding more debt to our problem. David Rosenberg it the nail on the head today when je said; “No one build more bridges, cemented more river beds, built more roads than Japan, but they could not break the deflationary spiral.” Bingo, we won’t break it that way either. In fact, the way we are going it will jump from inflation to rapid dollar devaluation, nice job Mr. Obama and Ms. Pelosi!
According to Harry Schultz and many tin foil hat wearers on the internet there will be a currency collapse and embassies should stock up on local currencies to last at least a year. This led to rumors of bank holidays and runs on the banks and other far out there rumors. Are these just paranoid people trying to conjure up publicity or is there any truth behind these strange stories.
I have to say that it is possible that some of these stories hold water, scary right? As you may know the Fed has had a huge currency swap program that has corresponded with the sudden strength and weakness of the USD which is quickly unwinding and may lead to new lows in the USD. That could lead to new lows in the USD and potentially start a currency crisis and, as I have said many times before, the Fed is unwilling to defend the dollar. However, it is unlikely that that alone will cause a complete collapse of the currency. It would take the foreign buyers of our debt to sit out of a few auctions, we would call these treasury auctions ‘failed’ auctions, along with new lows in the USD to trigger a collapse on our currency. I would say this has a probability of 65% of actually happening, it is there, but not a certainty.
What I think is more realistic is an actual bank run in the near future, I know here comes the tin foil hat. I want you to really think about what I am about to say, because it is all true. The FDIC is basically broke, really, it is. By my estimations it has just 4-6 billion in cash left and that is assuming it has not had to make good on any of the loss-share agreements in place. We are at our limit as far as the amount of debt the US is allowed to issue, hence the pending vote to raise the debt ceiling to $13 trillion dollars, which I have signed a petition against, in the effort of giving full disclosure.
So, if we have another few institutions go belly up over the next few weeks, which we will, and the new bailout for medium to smaller banks is not approved by treasury and the debt ceiling is not raised the FDIC will be officially insolvent. I put forth the idea that the only reason banks did not go under last year is because we knew the FDIC was there to guarantee our deposits. Now if the FDIC was suddenly incapable of providing that guarantee, would Americans really keep their money in the bank? No way. That would lead to a bank run like we have never seen before.
Thanks to our wonderful fractional reserve banking system all banks would then be in trouble when depositors pulled money from institutions. We should also face the fact that we should not even have the FDIC as it encourages banks to assume more risk and it encourages depositors to ignore how much risk their banks take, just my personal belief, but if you think about it there is validity to that thought. I do believe this is a very real possibility in the near future unless the debt ceiling is raised or the TARP bailout is designed for small institutions, which I am against.
If this bank run happens, which is possible, but unlikely, then it will be a much bigger problem than you think. It will force all cash loans to be called in. If you recall your history this was the cause of the 1929 stock market crash and the very beginning of the Great Depression. However, unlike 1929 the leverage we have today is much larger than back then which means the losses will be much, much worse. I contend it will make last year look like good times. Leverage is not our friend and leverage is the reason why we saw everything decline, including gold which usually goes up during times of trouble, but when you have hedge funds buying on 30 times leverage then they sell everything including gold.
A bank run is possible this year and I think a much bigger threat than a currency collapse. Actually, I think we are in a double edged sword situation because raising the debt ceiling will not help the dollar either which could lead to a currency collapse down the road, but nevertheless the banking system is still the biggest problem America faces in the near-term. This is not some conspiracy theory nonsense, but real life issues that are coming to fruition and that have to be dealt with. The only reason the Fed is pulling any of the stimulus is because we are so close to the debt ceiling. Of course, you have not heard about reaching the debt ceiling because the media is too busy talking about other nonsense issues.
My guess is that at the first sign of a major bank run we will have a bank holiday to sort out the problem. This would involve a recapitalization of the FDIC and probably some emergency action taken to restore faith in the banking system. However, no matter what they do, it is merely postponing the inevitable because we are a debtor nation who has to borrow trillions every year and we have a declining tax base. We will never be able to dig ourselves out of this hole because we do not have the political strength to do so nor do we have the assets either. Keep liquid, keep money around the house, buy physical gold and silver, I really like silver, and do your own homework, but I think you will find even I am soft peddling the news to you.
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