Are your funds insured?
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As reported here, FDIC funds might be once again running low after 41 bank closures this year. I’d be interested in thoughts from others on the implications of that as we approach a more intense deflationary phase in which bank closures will likely exceed those of the 2008-2011 period by some multiple.
This is a great topic–I’m glad you raised it.
I think a lot of Canadians are unaware of the fact that the deposit insurance won’t cover many types of Canadian bank accounts, like foreign currency accounts. So if you’re Canadian with US dollars in a US dollar account, you’re probably not covered.
And here in New Zealand, there is NO deposit insurance. In fact, bank employees here in NZ are pretty much unaware of what it is. I had to go through about four bank employees at my bank to find out what sort of government deposit insurance was on their accounts. Turned out finally, when I reached someone who knew what deposit insurance was, that the NZ government only provided temporary deposit insurance during the worst of the post-2008 credit crisis. That insurance has since expired, and the banker told me that “the banks are confident with their AA credit rating” so they don’t need it. Funny, I thought that deposit insurance was supposed to make ME feel confident, not you the banker. And tell me why AA is so great? Canadian banks with deposit insurance are triple-A. (The NZ bank has since been downgraded to AA-).
There have been some great arguments made that deposit insurance lulls us into a false sense of security about our banks’ risk-taking, and therefore deposit insurance should be abolished. It’s a persuasive argument. Except I see the total and utter complacency here in NZ when it comes to banks, and we have not had deposit insurance except for that short window I mentioned.
skipbreakfast post=5177 wrote: Funny, I thought that deposit insurance was supposed to make ME feel confident, not you the banker.
LOL.
skipbreakfast post=5177 wrote: There have been some great arguments made that deposit insurance lulls us into a false sense of security about our banks’ risk-taking, and therefore deposit insurance should be abolished. It’s a persuasive argument. Except I see the total and utter complacency here in NZ when it comes to banks, and we have not had deposit insurance except for that short window I mentioned.
I’m finishing Peter D. Schiff’s The Real Crash, wherein he makes that case. It’s also full of interesting court decision citations regarding Social Security and other arguably unconstitutional US economic/monetary/tax policies and programs. Interesting stuff. (He does have some blind spots–energy being the main one.)
What I’m thinking at this point wrt the FDIC fund is that it might get tapped out even before the next crash and never be replenished. (Which raises another question: how is it replenished?) So even fewer deposits might ultimately be insured than the limited amount that Nicole has suggested.
SteveB post=5178 wrote: What I’m thinking at this point wrt the FDIC fund is that it might get tapped out even before the next crash and never be replenished. (Which raises another question: how is it replenished?) So even fewer deposits might ultimately be insured than the limited amount that Nicole has suggested.
I think you’re right–it seems completely inevitable if the financial system continues to unravel–that leads to too many bank failures for the FDIC to possibly keep up with.
Insurance only seems to work when the claims are spotty. It doesn’t work where the claims are the result of a systemic failure.
An analogy for me is the Christchurch earthquake of 2011–people have insurance on their houses, but it becomes questionable whether insurance can pay out when EVERY house falls down. Many insurance companies have gone bust already, and I expect that there are more to come. I can’t help wondering if they’re already bust, and that’s why so many folks in Christchurch still haven’t received their insurance payouts! Every day that payout doesn’t come is another day closer to the point where no one is paid out.
SteveB post=5178 wrote:
I’m finishing Peter D. Schiff’s The Real Crash, wherein he makes that case. It’s also full of interesting court decision citations regarding Social Security and other arguably unconstitutional US economic/monetary/tax policies and programs. Interesting stuff. (He does have some blind spots–energy being the main one.)
Clearly, the modern insurance policy is a symptom of the greater malaise: we have handed over the personal responsibility for our lives to someone else. Whether it’s our money or the integrity of our house construction or what happens to our garbage or where our water comes from.
Ultimately, I think Schiff is right–deposit insurance has lulled us to sleep and we have let banks get away with murder. Now, we are so comatose NZ banks don’t even need deposit insurance to keep us apathetic. We are complacent enough all on our own now. How perfect for them!
The psychology penetrates deeply in the Kiwi psyche (just as it does in Canada and the U.S. where I’ve also lived). Here in New Zealand, there is a pervasive “culture” of permits for everything. And these permits are EXPENSIVE. In terms of “building permits”, they are sucking the life out of the people and the economy. But shockingly, Kiwis continue to defend the permit system. Because they’ve been convinced that the permits protect us–that without permits your builder will make your house fall down.
It is a complete relinquishing of personal responsibility. We have absolved ourselves of knowing how a house should be built, while we go to work every day and type on a computer. We think we can pay someone else to worry about this for us.
Instead, we must return to a time when we are responsible for our own house. We should know how it’s built, know how it should be built for the particular climate we live in, know the builder we hire because he is our neighbour and part of our community. We have mainly become dependent on insurance policies like this because we have given up responsibility for our own lives.
Similarly, we should understand and take responsibility for what banks do with our money. Insurance cannot replace that responsibility.
Insurance is nothing more than a bet. It’s not a guarantee, and we have to wake up and realize this. In terms of banks, FDIC insurance is currently a bad bet.
Of course our savings in the US are insured by the FDIC. It would seem the Fed would have to step in and provide funding if the FDIC ran out of funds.
I can think of no greater act to create mayhem, revolution, and total financial chaos than the the US government allowing depositors to go clean in Federally insured saving institutions. They realize this for sure and would print what was needed to pay.
The purchasing power of the paid out money is however, a totally different topic which has to be considered in this topic.
What I initially intended to write is that this situation might be quite different from that of the Great Depression–which Schiff notes (p. 78) resulted in the loss of only about 2.5% of all deposits due to bank failures–even though we now have the FDIC. I’m not making the case that we don’t need the FDIC (he made it well enough), but that its existence won’t make this time around any better. On second thought, he would probably say (again, rightly so) that its existence will make this time around worse.
Also, in arguing for the abolishment of the FDIC he writes the following on p. 85: “Consumers in other countries manage to bank without deposit insurance. Are New Zealanders that much smarter than Americans?” You apparently haven’t caught up with your new compatriots yet, Skip. 🙂
GO, given that the scenario I described is one of deflation, then bank closures, then loss of deposits, would the money printing you suggest occur after that? Do you think there’s another likely scenario in which banks would fail absent deflation? I’m just trying to draw out some more detailed thinking from your perspective. TIA.
SteveB post=5183 wrote: Also, in arguing for the abolishment of the FDIC he writes the following on p. 85: “Consumers in other countries manage to bank without deposit insurance. Are New Zealanders that much smarter than Americans?” You apparently haven’t caught up with your new compatriots yet, Skip. 🙂
I presume Schiff is suggesting that New Zealanders are doing something especially better than Americans with regard to having no equivalent to the FDIC–since apparently we have a great economy and banking system without it and the Americans should learn from our example.
You know, one thing that is becoming increasingly clear to me: sometimes one’s own, thoughtful, investigative experience on the ground is worth infinitely more than the wisdom of the “greats”. Because the greats can’t be everywhere, and so they have to rely on platitudes and accepted tropes like the rest of us. What I’m getting at is….
New Zealand is headed for a bigger economic collapse than anywhere I’ve lived yet. More so than Canada and the U.S. Schiff isn’t the only one who has lauded the NZ economy or its currency. But nearly three years into my life here, I’m deeply troubled. The life on the ground here is revealing vulnerabilities that the rest of the world seems to be unaware of or ignore. I think NZ is too small to really care about (its population is only 4 million). And yet the similarities with Ireland are quite shocking (also a country with a similar population and similar private debt).
Personally, I’m not looking for New Zealand to be an example of how we do anything right…except that farmers here really do know how to farm, and a lot of people seem closer to that way of life than the U.S. or Canada. Many of my Auckland compatriots grew up butchering a lamb themselves. I can’t say the same for my fellow Torontonians or Los Angelinos!
Anyhow, I disagree with Schiff in this respect. Our lack of FDIC insurance equivalent is NOT an indication we hold our banks to a higher standard–not today anyhow. It is truly because we are more naive and complacent, so the banks don’t even have to bother with the expense of it (because it DOES cost the banks something eh). Kiwi complacency will be our undoing.
Hi Steve, It is a very complex question with many possible outcomes.
My answer as to the deflation scenario you speak of is probably going to startle you, but I have thought about it for quite some time and have to disagree with you
In a deflation, I picture crashing stock markets and corporate bond markets, with everyone selling and placing the proceeds in government bonds and FDIC insured bank deposits for their implicit government guarantee of safety. I realize it is a minority view but it is my opinion nonetheless. Your conclusion of many bank failures in a deflation is in error in my view.
There will of course be many who choose to hold cash, as they will trust no one, but I think they will be a minority, and fear of robbery and such will place a natural limit on hoarding too much cash.
Golden Oxen post=5187 wrote: Hi Steve, It is a very complex question with many possible outcomes.
My answer as to the deflation scenario you speak of is probably going to startle you, but I have thought about it for quite some time and have to disagree with you
In a deflation, I picture crashing stock markets and corporate bond markets, with everyone selling and placing the proceeds in government bonds and FDIC insured bank deposits for their implicit government guarantee of safety. I realize it is a minority view but it is my opinion nonetheless. Your conclusion of many bank failures in a deflation is in error in my view.
There will of course be many who choose to hold cash, as they will trust no one, but I think they will be a minority, and fear of robbery and such will place a natural limit on hoarding too much cash.
Yikes, that’s a minority view for a reason. It’s just plain impossible.
In a deflationary depression, bank losses become gargantuan, as people can’t pay their loans. The amount of loans that the banks would have to write off would easily dwarf the deposits the citizens could possibly cobble together to put into a savings account. It really begs the question–in this current “early depression” moment of history, people don’t have any money to put on deposit at the bank–why on earth would they have the money once the depression gets going in full swing? Whether the government would print enough to bail out all the bank failures is another question–but that is one addressed quite thoroughly in the writings in the TAE primers regarding the limits of money printing in a deflationary crash.
Alas, SteveB, you fell for Golden Oxen’s hyper-inflationary hyperbole bait. And the discussion of bank deposit insurance is really worthy of a conversation on its own. You’re being a great and generous diplomat today, Steve. All I can say, is there’s a time for diplomacy…and your generosity might not be warranted. He’s just looking for trouble and refuses to address any of the true arguments that underpin TAE’s positions on deflation. A healthy debate is one thing. Repeating the same argument over and over on a deflation blog without ever referencing the deflation blog’s own writing, sources and position is another. I guess that’s what internet trolling is all about.
@skipbreakfast, My dear pupil, have you forgetting that bank loans have collateral behind them and that the major component of of a banks reserves are in government bonds which soar in value in deflation and they keep fueling the rally with new purchases from new deposits.
Also keep in mind your wizardry that temporary bank losses are not bank failures nor are they depositors runs on the bank. It is hard to understand these matters when you are trying to figure out which wave we are in with your Captain of the waves and road maps directing you but they do matter my dear Eliot Wave Scholar. I am talking about the fifth of the fifth major wave, but it could be a minor c if it fails in length and time to surpass sub wave b. Hopefully that clears it up for you.GO, the tone is totally deteriorating into the toxic. I really value that TAE tends to be one of the few places for intelligent, vitriol free places of online discussion about finance and economics and life! I am happy to accept sharp criticism of ideas with sound arguments. A sharp argument is as good a lesson as a good spanking. No need to get all personal.
My completely unemotional response to your points is that we had massive bank failures in the Great Depression. I don’t see that you’ve offered a reason that the current Greater Depression will be any different.
Golden Oxen post=5187 wrote: In a deflation, I picture crashing stock markets and corporate bond markets, with everyone selling and placing the proceeds in government bonds and FDIC insured bank deposits for their implicit government guarantee of safety.
Selling to whom? Wouldn’t the proceeds be extremely low if there were any to be had at all?
Golden Oxen said “I can think of no greater act to create mayhem, revolution, and total financial chaos than the the US government allowing depositors to go clean in Federally insured saving institutions. They realize this for sure and would print what was needed to pay. “
I am not so sure that the government would print the dollars to cover every FDIC depositor. Rather I think the government would set limits on the amount the depositor could withdraw.
There is already precedence in Ohio during the Savings&Loan crisis in the mid 80s…
March 15, 1985 – Ohio Governor Richard Celeste temporarily halted business at all of state’s ailing thrifts;
March 21, 1985 – allowed to reopen on with $750 cap on withdrawals (designed to prevent all-out assault on deposits)https://www.kipnotes.com/SavingsLoans.htm
edit to add link
@bluebird, Sure that is possible, in my opinion a very bad move on his behalf to instill confidence. Note that was a local run on thrifts not a national run on all bank deposits.
In our most recent crisis of bank distrust the government increased the limit of FDIC insurance from 100 to 250 thousand per account and reassured the public they meant it. It was their response to a national crisis, not local as your example, but in either case there was no consideration of not honoring the deposit insurance.
It is still my opinion the Federal government will print all the funds needed to guarantee the sanctity of the FDIC insurance.
Golden Oxen said “The purchasing power of the paid out money is however, a totally different topic which has to be considered in this topic.”
Exactly so. If everyone ran to the banks to withdraw all of their deposits, the money would have little to no value. They may have all their money, but it would likely take a wheelbarrow of dollars to purchase a gallon of milk for the kids.
Personally, I don’t think they will ‘print’ for depositors. We are in a global financial crisis, and to prevent a worldwide panic of bank runs and mayhem, they will need to coordinate a global temporary solution…such as a limit to the amounts that can be withdrawn.
What about NCUA? That is what my credit union claims to be insured by. I can’t see how it would be any different than the FDIC when push comes to shove, but just curious if anyone thinks it is a better option?
Thanks in advance,
ab
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