Topic: Monetary Policy
What Will The FDIC Do For Funds In 2011? The FDIC's recent proposal to collect three years' worth of premiums from its members in order to cover the cost of closing banks now raises a question about what they will do when the crisis gets worse.by Walt Thiessen
(libertarian)
Sunday, November 1, 2009
It barely received any coverage in the news, and the financial wizards in front of the TV cameras aren't even paying attention to it. The FDIC recently proposed that its 8,000 member banks pay their next three years' worth of deposit premiums now to help fund the FDIC's ability to keep shutting down banks in trouble. This past year, while the number of foreclosures has been higher than experts desire, it's important to note that this is the lull in the storm. We already knew two years ago that this would be a lull, when Credit Suisse issued their report on the state of the banking industry, which 60 minutes finally noticed a year later, one month after the "official" start of the crisis. Now, however, the number of foreclosures has started increasing, and it will continue to increase until the end of 2011, at which point the number of foreclosures, and troubled banks, will reach another peak like they did in 2008.
Source: 60 Minutes
This raises a question: if the FDIC raises the money now and spends it to shut down banks currently in trouble, what cash will they use in 2011, when those funds are all used up, and banks are falling like dominoes?
Two possibilities exist. First, they could simply try to raise more advance premiums from the banks. However, by that time, the balance sheets are going to look a lot worse. Another large hit in the form of deposit premiums will not be a realistic option. Second, they could once again turn their eyes to the Federal Reserve to create more cash out of thin air. That won't be realistic either.
The problem is that the Fed have already played that card, and the world trembled. The card already lies on the table to the tune of trillions of dollars. The result is that the dollar's value compared to other fiat currencies has fallen precipitously. The US Dollar index, a measure of the dollar's strength against the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish krona, and the Swiss franc, which a year ago measured in the range of 85 to 90, today is in the mid-70s. This means that the dollar lost roughly 10-15% of its value compared to the other, very weak fiat currencies of the world over the past year, as a direct result of the Fed's actions. The record is even worse when examined over the past eight years, because the dollar has lost almost 40% of its value compared to foreign fiat money during that time. If the Fed tries to play another card just like last year's bailout card, it would likely leave the dollar in tatters, setting the stage for the removal of the dollar as a world reserve currency.
It's difficult to make clear to Americans how damaging this will be to the American economy. Once the Chinese the Japanese, the Europeans, the Middle Eastern sheiks, and the other holders of dollars around the world regard the dollar as no longer worthy of its exalted status, they'll start dumping it. In fact, there are rumors that they already have started. All it takes is for all those dollars to start getting spent in the economy, and hyperinflation will fall upon us.
Instead, the Fed, the U.S. Treasury, and the other princes of financial darkness assure us that the economy is recovering and that all will be well eventually. Even the media seem to buy this line, only fretting about the continuing high levels of unemployment in the 10% range. They conclude that the economy will recover, but the recovery will be slow because so many people are out of work. This disconnect between rhetoric and reality is disconcerting at best and intentionally deceitful at worst. The FDIC's proposal to collect three years' deposit premiums in advance is tantamount to confessing they can't continue to bailout the banks, even after all the newly minted money that's been lavished on them. In essence, the banks and the regulators are caught between a rock and a hard place, knowing full well that things are going to grow progressively worse over the next two years. When the crisis peaks again, this time in 2011, they will not be able to again bail out the already weakened banking system.
The voters have already made clear that they opposed the recent bailout. There are no more bailout cards to play. What will the powers-that-be do when the spam hits the fan? I shudder to think about it.
Walt Thiessen is the author of the new novel, The Money Suckers, available as a free e-book download.
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my vote is that they will print! they have no choice.
you nicely noted the vast chasm between the "financial" sector and the productive sector. i think we find either 1. the road to bigtime inflation with good employment but no value or 2. stagnating employment.
in severing their tie to production, the financiers have actually put themselves in a precipitous position. in order to make the economy whole, they must give it up for the team and that is unlikely to occur. natural laws cannot be denied forever!
Posted By: Jahfre Fire Eater
Date: 2009-11-01 10:31:51
Hi Walt,
I don't know how it will play out but my take on the pre-payment plan is to get money out of banks now before they go under. This doesn't solve anything, just buys time. The only sense behind that plan that I can see is if they hope the bank failures end before they run out of money. They are at the bottom of the barrel now. The pre-payment plan is tipping the barrel towards the spigot. They only chance of success is if the barrel begins to be filled again before the last drop runs out the bottom. The race is on.
Right now the financial masters still think they can juggle their way through this. As job losses mount and lifestyles scale back they will find their juggling skills no match for the avalanch of consequences that must be faced. However, I don't think either of the alternatives you described will be allowed to happen. This situation is not going to be allowed to seek it's own course according to the theories from various academic guild's. In any game a players options are:
The possible
The logical
The likely
Philosohers explore the possible and dabble in the logical. Academics acknowledge the possible but focus their passion and faith on honing arguments regarding the logical. Historians and political strategists and the economic elite are only concerned with the likely.
I believe the Reagan-esque prosperity through military spending is more likely than things just continuing as they are theorized to do. Only this time it can't be a sabre rattling build-up; Obama is likely to use the job situation and the dollar's devaluation as incentive to institute a draft right about the time something happens to justify an enormous military invasion somewhere.
Japan didn't have that option. Obama does.
Right now the dollar is being used in the carry trade. Speculators borrow cheap dollars and invest in foreign growth. This has all the makings of another bubble in world markets and maybe in world economies. There could well be another flash of prosperity here and a rebounding of jobs and productivity that really looks like a recovery. However, I don't think it will last long enough for the trickle down effect to spur indutrial growth and production here. Instead, to keep the USA's neck above water in the credit juggling game the FED will have raise interest rates. I expect that to preceed the coming escalation of war and the draft, but not by much.
The FDIC is backed by the full faith and credit of the US Government. That's of little comfort to those of us who understand the government is broke. However, the Government does still have the printing press. So in my opinion that will be their only option. If they default on the deposit insurance they will have to face the RPODWG (Really Pissed Off Depositers With Guns). :-(
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