Friday, April 24, 2009

The FDIC is Bankrupt

The financial crisis has been very confusing for a lot of people. One of the websites I frequent has recently posted a possible explanation for the insanity - The FDIC is totally insolvent, and the bailout is all about covering it up.

Here is the quote (obviously speculation at this point):

We trusted FDIC insured accounts and CDs with our savings. The highly-leveraged banks gambled those savings on subprime mortgages combined with insurance against default in the form of credit default swaps and such.
The flood of money into the subprime market dramatically increased the values of properties above sustainable levels—a bubble. Inevitably, the bubble burst. The insurance that raised junk mortgages to AAA credit ratings worked in theory, but not in practice, for various reasons that have yet to be disclosed—probably technical stuff like overly thin markets, everybody depending on everyone else to do due diligence, basis risk, and so on.
Now, the amount of FDIC-insured deposits that were lost exceed by far the amount the FDIC can cover with its cash and credit lines.
The politicians have decided we cannot be trusted with that information. If we knew, we would have a nationwide run on every bank. The federal government would have only one option: to print money. That, in turn, would trigger hyperinflation for which the politicians would be blamed and thrown out of office. So instead, they are hoping against hope that a recovery will happen and the home values will go back up enough that the run never happens.
Unfortunately, instead of policies likely to cause a recovery—Reaganesque tax cuts, pro-enterpreneur law changes, drilling, and Ebeneezer Scrooge-esque government spending cuts—we are wasting money with pork, earmarks, union boosting, cap and trade, and free health care for everyone.

Big Jay here again. I had previously considered the possibility that the FDIC doesn't have the reserves to cover for all the potential defaults. Why wouldn't they just come out and say that? Wipe out the shareholders. Wipe out the bondholders. Use the TARP money to cover depositors.

But maybe that information - The FDIC being insolvent - would be too much for the markets to handle. What do you guys think?

1 comment:

Andrew said...

This theory makes sense. Remember a few weeks back when the Federal Reserve asked for more money? It was downplayed by the media, and in running a quick search to link an article, I didn't find anything obvious.

The Federal Government has gotten so used to its unconstitutional role as nanny, I'm sure they're hiding things from us, assuming we can't handle it.

The problem is, given that the current uninformed electorate essentially treated this last election like a high school class president election (that is, a glorified popularity contest), the government may be right. People might not be able to handle it, they might panic and collapse the system.

Perhaps more importantly, the current policies are suicidal. Reagan's methods did work, as the author pointed out. Keynesianism has never been demonstrated to work so far as I've discovered. The real problem may be that if there were full disclosure, the citizenry would finally demand an end to excessive spending and income redistribution, which would deprive the government of its most cherished achievement: power it shouldn't have.