FDIC Fund Strained by Bank Failures May Lift PremiumsBy Alison Vekshin
Aug. 11 (Bloomberg) -- The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.
The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the Federal Deposit Insurance Corp.'s fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for insuring deposits will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision is due by the fourth quarter.
``It's going to be a bloody, expensive mess for the banking industry,'' said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia. ``Healthy banks are paying for the mistakes made by failed banks.''
The pace of bank closings is accelerating as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31. This is not a cheap thing going on with these banks. Playing with a system and allowing the federal government to just step in may very well lessen the pain in the short-term, but few are looking at the long-term picture and whether or not the system itself is flawed. It has gotten to the point where a $300 billion homeowner bailout bill is passed almost without a second thought. Seriously,
$300 billion? Fannie Mae and Freddie Mac received an unlimited line of credit to the Treasury. We are constantly assured by Paulson and Bernanke that the company's are in fine shape and its simply a precaution. In their most recent quarterly reports both companies lost a huge amount more than expected. In the end, who is going to pay the bill? While I would like to say that the hundreds of billions of dollars being used to bailout anyone who cries for help will not come out of thin air, it most likely will. Such is the fiat monetary system.
The unfortunate thing for the individual here is that the end result from this relentless printing will come in the form of more inflation and a further decline of the dollar. Heck, just today the Fed "auctioned" (*cough*
printed*cough*) another $25 billion to banks in an effort to sort out the wide array of problems in the industry. I honestly don't know how people could believe that you can print trillions of dollars out of nowhere in the matter of a few years and not expect to face severe consequences as a result. It is nothing more than a counterfeiter sending counterfeit bills into the marketplace. The currency gets diluted, prices go up, and the hardships start.
Believe it or not, the Founding Fathers were some of the few who actually understood this. Paper money was briefly tried by the colonies in an effort to pay off the massive debt accumulated during the Revolutionary War with a great lack of success. Once the war was over and a monetary system had to be put in place, paper money was very unpopular and with the
1792 Coinage Act the mint was established and the backed-money system put into place. The penalty for counterfeit, embezzlement, and fraud from any employee or officer of the mint? Death. Times sure have changed.
I am not exactly saying that the best way to go is to return to the monetary policies of way back when. What I am saying is that Founders had firsthand experienced and seen what harm paper money brought to the economy and country. Fiat monetary systems have been played and experimented with dozens of times throughout all of history all around the world. The one thing all these experiments have in common is that the system collapsed and was no longer sustainable. Fiat money leads to a worthless currency, higher prices, and economic stability. And while I absolutely hope that I am wrong, I don't see why today it would be any different with the U.S. and the major economies around the world.
A fiat monetary system has other negative impacts. Easy money and easy credit from the Fed has taken a lot of the focus off of long-term results and sustainability and has rather put all the attention on short-term results, regardless of where that road leads. While the blame will most likely continue to be on capitalism and lack of regulation, hopefully somewhere along the line the blame will finally be brought to the Federal Reserve. I'm keeping my fingers crossed.
Tags:
bubble, fdic, federal reserve, fiat money, gold standard, housing, monetary policy, subprime
Posted at: 07:54 AM | Add Comment
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