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Kind of a worry - for those who would get a much better interest rate at a certain institution (bank or credit union) and would be tempted to put all their eggs in that basket.
Actually, it happening already. I just talked with a broker and he told be institutions are buying multiple CDs, keeping them under the $250k FDIC insured amount. As more do it, there will be further pressure pushing rates down for everyone.
Actually, it happening already. I just talked with a broker and he told be institutions are buying multiple CDs, keeping them under the $250k FDIC insured amount. As more do it, there will be further pressure pushing rates down for everyone.
If the aggregate amount of money in an institution remains the same, then I don't think it will affect interest rates. Now, if institutions start moving large amounts of money from Treasuries to banks then that would be a problem. But I will not happen for a variety of reasons, liquidity being foremost.
FDIC insurance on accounts in the US in inherently a good thing. However - the money is not really "insured". In the event that the US government ever had to come to the table and insure the money in accounts, it would simply do so by having additional money printed to replace what they insured. Which would result in massive inflation. So FDIC insurance is nothing more than a shell in a shell game. Unless someone can purchase insurance against government induced inflation, which is a devaluing of the existing money supply - they nothing in US dollars is actually ever really safe, objectively speaking.
FDIC insurance on accounts in the US in inherently a good thing. However - the money is not really "insured". In the event that the US government ever had to come to the table and insure the money in accounts, it would simply do so by having additional money printed to replace what they insured. Which would result in massive inflation. So FDIC insurance is nothing more than a shell in a shell game. Unless someone can purchase insurance against government induced inflation, which is a devaluing of the existing money supply - they nothing in US dollars is actually ever really safe, objectively speaking.
The primary reason for FDIC is to prevent a run on a large number of banks. When faced with similar problems during the Lehmann collapse, the FDIC was able to close banks in risk, guarantee all insured deposits (even increasing the amount insured on specified accounts) and resell the bank assets, frequently at a loss. Since no one has ever lost a penny in an insured account, there has never been a general run run on banks.
The FDIC has itself incurred losses that has affected all banks since banks have to pay for the insurance via an imposed fee. This unfortunately unjustly imposes large fees on well managed banks when there are many poorly managed banks going under. I understand that there is more rigorous rules and oversight now then there was previously. Unfortunately, with the repeal of Glass-Steagall, the most formidable protection of bank assets was removed, hence the bank crisis. Had Glass-Steagall been in place, there would be a virtually impenetrable firewall preventing banks from speculating with depositor assets. This is unfortunately still not the case.
The primary reason for FDIC is to prevent a run on a large number of banks. When faced with similar problems during the Lehmann collapse, the FDIC was able to close banks in risk, guarantee all insured deposits (even increasing the amount insured on specified accounts) and resell the bank assets, frequently at a loss. Since no one has ever lost a penny in an insured account, there has never been a general run run on banks.
The FDIC has itself incurred losses that has affected all banks since banks have to pay for the insurance via an imposed fee. This unfortunately unjustly imposes large fees on well managed banks when there are many poorly managed banks going under. I understand that there is more rigorous rules and oversight now then there was previously. Unfortunately, with the repeal of Glass-Steagall, the most formidable protection of bank assets was removed, hence the bank crisis. Had Glass-Steagall been in place, there would be a virtually impenetrable firewall preventing banks from speculating with depositor assets. This is unfortunately still not the case.
Glad to note there is something you and I agree on. It was bound to happen sooner or later. Excellent post.
But its the huge nmber of traditional lending banks that have filked in numerous numbers that FDIC has had to take over.Many of the finacial banks would stop bankig if it was not allowed to specl ulate with thier own money.
But its the huge nmber of traditional lending banks that have filked in numerous numbers that FDIC has had to take over.Many of the finacial banks would stop bankig if it was not allowed to specl ulate with thier own money.
Under Glass-Stegall, investment banks (not commercial banks) were allowed to speculate with their own money and other uninsured deposits to their hearts content. It was only after Glass-Stegall was repealed that banks could speculate with FDIC insured deposits. The result is that prior to the repeal of Glass-Stegall there was never a banking crisis (there was a small savings and loans crisis in the 1980s). Soon after the repeal of Glass-Stegall, we had the massive speculation of insured deposits followed by the melt down, followed by the bailouts, followed by the economic maladies that we are now experiencing. Notice, that we had open uninterrupted growth and stability in our banking system until Glass-Stegall was repealed.
As a side note Elizabeth Warren, an advocate of bringing back Glass-Stegall has just been elected Senator of Mass. There are other fiscally conservative representatives who also advocate a return to Glass-Stegall in order to help guarantee the stability of our financial institutions. BTW, the banks are again speculating with our deposits, e.g. the 20 billion Chase Morgan scandal. While small in comparison to the housing derivative fiasco, it still underscores that unless closely watched, the banks will still gamble with insured deposits.
one of the issues was that banks under glass-steagall had no way to protect against defaults .
if they made a loan to another country or company and it looked like the tide turned and they may not get paid there wasnt much they could do to hedge that loss.
credit default swaps were a way the banks could hedge against a loan that turned shakey , but they couldnt partake.
by having a betting parlor where they could bet against themselves not getting paid, that would offset the loan hit.
the problem is these became huge casinos with the bets on the defalt becoming greater then the default.
for those of you who dont follow along .
imagine you loan someone1000 bucks.
you start to have doubts that this person will re-pay you .
your friends say your over reacting and this person will pay you.
you say to them ,want to bet? ill bet you 1000 bucks i dont get paid.
well all the people who know this person want to get a piece of the action and now there is 100k riding on the fact that you may or may not get paid your 100k.
in fact you stand to make 99k if the person stiffs you for 1k.
goldman sachs was accused of acually talking customers into taking mortgages and loans they knew they may have trouble re-paying then bettng with credit default swaps against their customer for even more profit .
thats a credit default swap and thats one of the things that added to the almost financial collapse we had when those that bet the long shot won and others had to pay and didnt really have the money to play.
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