The FDIC is Completely Bankrupt
The Federal Deposit Insurance Corporation (the FDIC) is the staple of American banking security and stability. People aren’t afraid of putting their money in the bank because the government is essentially going to insure their deposits, up to $250,000 per account.
But unfortunately, the FDIC is understaffed and bankrupt. As of May, they had negative $20 billion in assets. Read that again. It’s bad to have negative money when you’re the insurance group that is the foundation of the banking of the United States.
That’s not all… the FDIC is also understaffed and underfunded, meaning they aren’t doing they’re job of shutting down risky banks very well. That means the system is more vulnerable to a collapse — a collapse that the FDIC can’t insure. Can anyone say “scary”?
The FDIC is Bankrupt
One of my favorite blogs to read is Zero Hedge. They’ve always got great analysis and news, and you should check them out. Back at the end of May of 2010, a post about the FDIC being bankrupt was posted with some great insight directly from the FDIC themselves:
“The FDIC’s quarterly banking profile has been released. Inbetween all the fluff we find that the deposit “insurance” agency has exactly negative $20.7 billion to satisfy any upcoming bank runs and liquidations. Thank god for that ongoing Treasury lifeline. Atatched is a chart of the Deposit Insurance Fund-to-Deposit ratio. Negative is, well, bad.”
Luckily, the FDIC has a credit line that comes straight from the Treasury. Still, if a systematic failure becomes inevitable, the entire financial system will become flooded with frightened savers if there’s any talk at all about the FDIC not being stable — this is kind of important.
What’s worse about the FDIC’s funding issues lately isn’t just that they don’t have money to bailout savers — it’s that they don’t have enough money to do their own job right now.
Understaffed and Underfunded
As Jonathon Weil reported for Bloomberg News, the FDIC is also underfunded and extremely understaffed, which is leading to the job not getting done the way it ought to be done. From the Bloomberg article:
“Hundreds of small banks remain grossly undercapitalized, unable to raise new funds, and yet continue to operate. That’s partly because the Federal Deposit Insurance Corp. doesn’t have enough money or staff to seize all the banks that it should.”
The FDIC’s problem with money is acting as a double-problem: they don’t have enough money to make sure they close risky banks in time, and if a risky bank goes under, they don’t have any money to bail them out without going further in debt. Both problems are causing the other, leading to a hideous cycle.
Either way, this is certainly one of the reasons I’m not a huge fan of CDs or trying to earn interest from bank accounts — the idea that they’re a risk-free way to store capital is completely false. Cash is great, but too much cash is a risky way to store capital because even a government-backed investment can collapse.
It’s all about diversity, and is another reason to find as many profitable ways to invest as one can familiarize themselves with. The FDIC’s problems is also another reason to buy gold — because if something happens, investors and savers alike will flood to gold investments.
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