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Wednesday, August 5, 2009

Denninger: Warning Related to the FDIC

From Karl Denninger, another post in this series:

I'm going to put this bluntly, at the risk of being called an "extreme doomer", even though the scenario I am outlining here has only, at this point, a reasonably-small (perhaps 10-20%?) chance of happening.

During the S&L Crisis many people who had (up to $100,000 at the time) money below insured limits were prevented from getting all their money at once.

The circumstances?

The same as we have today: State-run insurance, which insured some S&L accounts, ran out of money, just as the FDIC is out of money under any rational accounting.

Note that these insurance funds were "backed" by the full faith and credit of the respective government just as is the FDIC. Nobody lost money, and so Sheila Bair's (and Suze Orman's) claim that "nobody has ever lost a penny in insured deposits" (so far) is true.

However, some people were only able to get a limited amount of money - in some cases $750 to $900 a month or so - out of their accounts, and that state of affairs persisted for quite some time.

It is thus my position that even if you are well under FDIC limits you must move money around now so you have multiple bank accounts and thus if your withdrawals and access to your funds are "rationed" in a similar fashion you will be able to access what you need to pay your electric bill, put gas in your car and buy your food.

Remember, getting your money back doesn't mean getting it all right now, and government agencies can be very inflexible when what they have decided to do conflicts with what you want...

Read the rest of Denninger's article, then pass it to others (along with its predecessors).

The orchestra is about to start the overture...


Blogger shiloh1862 said...

Yup coming to head very soon. I would suggest that a couple of months of cash be obtained by all.


August 5, 2009 at 2:40 PM  
Anonymous Anonymous said...

The orchestra is about to start the overture...--Concerned American

Let me introduce a discordant note into these proceedings.

The US Household Savings Rate (as a per cent of disposable income) was 7.3% in 1991--the year S&Ls were absorbed--compared to 2.9% in the 4th quarter of 2008.

Admittedly, in 1991
disintermediation was well underway, and money was fleeing S&Ls in pursuit of higher yields elsewhere.

Even so, present-day individual losses will be small potatoes if the FDIC defaults on its obligations; it is small businesses with a commercial real estate emphasis finding themselves unable to meet payrolls because their operating capital is ensnared by an alphabet-soup government agency that represents the greater risk. This freeze-up will generate knock-on effects in related industries.

The greatest threat from an FDIC default is a new wave of unemployment.


August 5, 2009 at 3:05 PM  
Blogger Concerned American said...


Agreed that the FDIC "insolvency" will be less important than the

a) impact on cash flow for those who count on bank accounts; and

b) psychological effect

August 6, 2009 at 2:52 AM  

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