The FDIC has less cash to cover its larger liabilities than AIG had to cover its liabilities.

[originalpckelly]

AIG had liabilities of $3.6 trillion, and cash on hand to cover those of $100 billion or so.

The FDIC (in 2007) had liabilities of $4.29 and only $55.4 billion to cover those.

OK, so you're like, "they'll pump government money into the FDIC to cover any losses" and I agree.

I posted about this yesterday after getting interested in it due to Sheila Blair saying the fund could run out, as reason to increase bank premiums.

Even if they increase the premiums a little, they're still screwing us. This is just another example of privatizing gains and socializing losses.

And by the way, the risk that these banks will need money is very severe. Every bank and credit union is a house of cards. These banks only keep 10% of their deposits on hand to pay people who withdraw their funds, that's the threshold the FDIC uses to call a bank "well-capitalized".

ONLY TEN FUCKING PERCENT!

90% of the deposits are lent out!

Even if only 20% of the depositors of a bank decide to cash out, it will bring even the "well-capitalized" banks down.

And this is only FDIC insured deposits, which it would seem, are the minority of deposits. The money supply will collapse, just like it did during the Great Depression, because if the depositors with money over $250,000 in a bank account don't get the money back, it means that the money basically goes poof because of the way a fractional reserve bank actually works.

If the money supply collapses, it means that there is a scarcity of money, and according to simple supply/demand economics, the value of money will increase. This will mean prices further decrease, and we will enter a deflationary down-spiral. The turbulence it will cause will be striking, because if everything scaled downward price wise at the same time, things wouldn't be any different, but there will be differentials between prices and labor, and while that sounds good, it means that people will be laid off or have to take massive pay cuts. But not all goods/services will fall in price at the same time, so there will be hardship.

So even if the government fully backs up the FDIC, it will still have a massive impact on uninsured deposits.

On the other hand, when the government spends money to backstop the FDIC, it will most certainly have to be deficit spending. We already are running large deficits yearly, and we've racked up tons of debt. We don't have much further to go before the debt is 100% or more of GDP, and countries and investors may be reluctant to lend us money. The credit rating of the US government may be downgraded. And then it really hits the fan, and it may be the end of America.

Certain events I'm talking about here are actually less severe than the Great Depression. I repeat, this scenario is far rosier than the Great Depression, but it will impact us more, because our government is already in a compromised fiscal state. It's the difference between getting sick as a healthy vital young adult, or while elderly.

[TNDemo]

1. So are you going to keep your money in the bank?

Where, if not?

[originalpckelly]

2. I don't have much...

but what I have is in the only major bank with a AAA credit rating. I have well under the insurance limit, so I'm safe.

But even if most of us don't have over $250,000 in the bank, the money will still go poof, and that will impact us all.

[originalpckelly]

4. Strike that Wells Fargo was downgraded by moody's...

it's not longer a AAA rated bank. :-(

[pokercat999]

5. My Wachovia savings account only pays 0.15% interest, the

mattress interest rate at my house is just slightly lower and doesn't require FDIC insurance.

[originalpckelly]

6. I know, my interest rate was about the same.

I made 5 cents. WOW! I don't know what to do with my fortune.

[damntexdem]

9. Remember: your mattress can spring a leak.

Read Jonathan Alter's 'The Defining Moment' for his discussion of what people did in 1932-33 as the banks were failing nationwide.

Of course, this is why the FDIC will be kept going, if nothing else is.

[TNDemo]

12. Can you elaborate on that?

Haven't read that book.

My husband's uncle died recently at age 100. He was a farmer but not a dirt farmer - a real businessman. He always had the best equipment and made a bunch of money. Anyway, in 1932 he got married and sold his crops for the year. They bought a kerosene heater and put the rest in the bank. The next day the bank failed. I don't know how long it took him to go back to banks but he did. No real reason for that story - just related to your subject.

[leftstreet]

3. So then, there won't be any ponies?

Interesting stuff!

[damntexdem]

11. Don't assume that -- just keep shoveling.

And don't mind the smell.

[KharmaTrain]

7. FDIC Is Handling The Small Fires...

They're the ones who prevented the run on Indy/Mac and other banks and they've been "eating" many of these places to keep them viable...at least from going completely bust. AIG is a systemic problem...so many accounts were underwritten that their default will happen far faster and be more widespread.

In many ways, the banking system is in a state of suspended animation. Without the flow of credit and money the purpose of a bank ceases to function. They can't make money to either pay the interest even on the meagerest of savings accounts or loan money that is cranking business to a halt. If I had a choice (which fortunately I don't), the FDIC will be the long-term key to an economic recovery as their control of smaller banks can make it easier to quickly get money and credit flowing again.

AIG will eventually become a toxic dump...any and all good assets will be stripped, if they haven't already and the loans that can either be rewritten or paid down will reduce what's left, but it still will stink and take years to clean up. The problem is too big to fail means just that.

[damntexdem]

8. But the FDIC has the federal government to bail it out.

Whereas AIG doesn't have -- oh, never mind! ;-)

[originalpckelly]

10. :-)

And remember, it's all about privatizing gains, socializing losses. It's reverse Robbin Hood.