Bank Failure Friday Comes Early 31 comments
-
Font Size:
-
Print
- TweetThis
Failure Friday is early this week: today bank shoot green all the way to the grave is John Warner Bank, from Clinton, IL. Likely more to come today.
The FDIC and State Bank of Lincoln entered into a loss-share transaction on approximately $31 million of The John Warner Bank's assets. State Bank of Lincoln will share in the losses on the asset pools covered under the loss-share agreement. The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $10 million. State Bank of Lincoln's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to alternatives. The John Warner Bank is the 46th FDIC-insured institution to fail in the nation this year, and the seventh in Illinois. The last FDIC-insured institution to be closed in the state was Bank of Lincolnwood, Lincolnwood, on June 5, 2009.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 31 comments:
72 banks failed since 2008, 25 in 2008 and 47 in 2009 till now.
Today Illinois has most number of bank failures (8) this year after Georgia which saw 9 bank failures till now. California has 6 banks failures.
Check the complete list of all the failed banks at :
portalseven.com/Failed...
And on google map see where the banks are failing at :
portalseven.com/financ...
Some statistics about this bank failure :
John Warner Bank,Clinton, IL :
# 46th bank to fail this year in USA
# 7th bank to fail this year and 8th since 2008 from Illinois state.
# As of March 31 has $71 million in assets and $64 million in deposits
# State Bank of Lincoln, Lincoln, IL will assume all deposits of failed bank
First State Bank of Winchester, Winchester, IL :
# 47th bank to fail this year in USA
# 8th bank to fail this year and 8th since 2008 from Illinois state.
# As of March 31 has $32.9 million in assets and $33.3 million in deposits
# All deposit accounts have been transferred to The First National Bank of Beardstown, Beardstown, IL
The (usually) transparent process of inter-bank lending works so well that most of the time we don't even think about it. This process has largely weaned the public away from physical paper money. Note that most money (about 90%) now exists only as entries on bank ledgers, backed by loans (debt). Also, note that possessing physical paper dollars is like having equity in the economic output of the United States of America, and has no credit risk associated to it. Physical paper money is not anyone's liability.
Bank deposit money, on the other hand, does have credit risk associated to it. That risk consists of the liability of the bank in which the deposit resides. Strangely enough, most of the time the credit risk of bank deposit money is lower than the theft and physical-loss risk of physical paper money. That is why we use bank deposit money more than physical money. Through this (normally) transparent process of inter-bank lending, the banking system acts like a huge clearinghouse (essentially a giant ledger) which clears payments between its customers without the physical transfer of cash, and keeps track of who has how much money. Most money in the world economy is not physical (paper cash or gold) but logical (ledger entries).
To summarize: physical paper money is equity. Bank deposit money is backed by debt (actually that's not 100% true--reserves at the federal reserve system are also equity, essentially an electronic version of physical paper cash).
That difference -- that physical paper money = equity in the nation's economy, and that a bank deposit = debt (a bank obligation) causes great confusion.
We have become very comfortable with bank deposit money, without thinking much about the credit risk we are taking. Bank failures, when they happen, create confusion and chaos because the vast majority of businesses and individuals use checking accounts for convenience (they can write checks rather than handling physical paper cash) and they don't really think much about the credit risk that is normally associated with keeping their money (their most liquid capital) in a bank in a checking account. In fact, in most cases users of checking accounts do not want to take a credit risk. But in the current banking system there are no alternatives.
Is There a Better Way?
Consider the banking industry's contribution to society. The banking industry provides three major services to the public:
1. It provides a "safe" place to hold the public's most liquid assets (cash).
2. It acts like a giant clearinghouse (settling checks without physical paper cash transfer).
3. It is a source of loan money (banks evaluate the credit worthiness of borrowers). Think of "credit worthiness evaluation" as a service to society. If bankers do a poor job at evaluating credit worthiness they will end up mis-allocating economic resources.
What I am asserting is that it is possible to have a banking system where a customer would get benefits 1 and 2 described above without taking a credit risk, if banks gave people a choice between a regular account and a special "100% reserve account." These special accounts, which are not available to the public today, would have no credit risk. The money in such accounts would not be lendable. There would still be fraud risk, of course. A bank desperate for cash might be tempted to "dip" into the reserves allocated to their 100% reserve accounts. Of course we would make such "dipping" illegal. The 100% accounts would be the electronic equivalent of storing physical paper bills in a safe deposit box at the bank.
Such accounts would have no credit risk (like physical paper cash) but would have the benefit of being used in electronic transactions and be accessible by personal checks. Of course, a 100% reserve account would not earn interest but would most likely have monthly maintenance fees associated to it (similar to a safe deposit box; it would also be very much like the reserve accounts that banks have with the FED). Such accounts, if widely used, would lessen the impact of bank failures on the economy in terms of a contraction of the money supply, chaos and confusion--but would not completely eliminate them.
Lending involves business risks (credit risks). If a customer were to choose a non-100% reserve account then he would be subject to losing his money. This would force the public to do some homework before handing money over to a bank (in essence, customers would need to consider banks' credit ratings, quality of management, etc.). Of course in this type of setup, a non-100% reserve account would probably have to pay a higher interest rate than the fractional reserve accounts do today. In fact if the public had a choice of 100% reserve accounts, there would be no need to impose legal reserve requirements on non-100% reserve accounts. There would be a clear separation between accounts that have a credit risk and accounts that don't. The accounts with credit risk would need to set their interest rates high enough to attract depositors.
If our banking system were setup this way, we would avoid huge systemic risks in the future, since a major part of the money supply would likely be sitting in non-lendable accounts. Many enterprises probably should not take any credit risk with their liquid capital (utility companies, municipalities, states, hospitals, etc.). In any insolvency or bankruptcy the 100% reserve accounts would receive priority, and unless the bank was fraudulently “using” these reserves the deposit owners of such accounts would never lose their money. If an electronic deposit account with no credit risk were available, then any individual or business choosing not to use such an account would be subject to losing their at-risk deposit. If such an alternative were available, then the depositor who chose the lendable money account would be warned that he or she could lose money if the bank became insolvent.
Once this choice is given to the public the banks can then be allowed to fail without severely impacting the payment system which is needed to conduct day-to-day commerce. The only job of the FDIC would then be to insure smooth transfer of 100% reserve accounts to another bank.
I will go a step further and state that the availability of such accounts (non-lendable, 100% reserve accounts) should be mandated by Congress through force of law. Each business and individual should be able to choose whether they want to take a credit risk or not.
Mansoor H. Khan
aquinums-razor.blogspo.../
While they all were relatively small to tiny how many of the acquirers are effectively "out of the market now"? The number of banks willing to take on multiple failed institutions is going to inevitably shrink as the shuttering continues.
On Jul 02 11:39 PM optionsgirl wrote:
> Mansor Khan, why didn't you publish your response as an article?
> It merits its own space.
In fact, the backlog may now be so great that there is talk of the need for a "Bank Holiday" within months during which a number of failed institutinos could be dealt with. Some say this would be accompanied by a sizeable devaluation of the US currency (a step the IMF says is necessary for any US recovery, per a recent article, link posted below)
Links:
www.marketwatch.com/st...
247wallst.com/2009/06/.../
www.globalresearch.ca/...
www.forbes.com/feeds/a...
Of course, as necessary as the move might be, the havoc these two actions would wreak on an already fragile 'recovery' (lol) one can only imagine. Sadly, this is not out of the realm of possibilities. If some sources are to be believed, US embassies abroad are being told to stockpile local currency in order to meet expenses for up to a year : www.youtube.com/watch?...
You took the words right out of my mouth. I have stated several times in different places on seeking alpha that fractional reserve banking deserves a challenger. If we look at the overall net damage the bankers have costs this country (for example I'm told that with all the bail outs and govt deficit spending to cure the economy) that my share of the national debt is going to rise around 50-60,000. I may be collecting small interest payments on my checking accounts but how much am I really losing. Banks over the long term don't really seem to be able to lend money safely. Overall the common people are losing their ass while those who received the loans only to seek the protection of bankrupcy laws have made out (see they usually buy expensive houses in Florida before declaring bankrupcy). The bankers have made out quite well also.
I'd be willing to bet that people to people loans with a lawyer drawn up contract have a better chance than the loans the banks make. I'd even bet that if individuals could sell personal (IOU's) bonds in the stock market or bond markets (after disclosing all financial info as well as collaterall) could do a better job than the banks. I mean they've lost billions and billions. They are playing with other peoples money and they don't care whether they succeed or lose because they control the purse strings of the politicians.
Banking is the most corrupt business ever devised by man. The vast majority of us only deposit our money in the bank for storage and transactions. We don't place it their because we want the banker to loan out the money with a no doc no ID loan.
Banks closed during recent S&L crisis - 1300+
Banks closed during the Depression - 9000+
This "worst crisis since the Depression" isn't even even a blip on the above radar screen.
Whether it's just our age, or the addition of the Internet to media distribution, we seem to live in the land of exponential media hyperbole.
As with all pullbacks, we'll survive this one, and we'll recover. And, the investors who can see past the negatively-hyped news and assess the genuine data and facts will be well rewarded for their efforts.
www.nolanchart.com/art...
There were 70 bank failures per year in the 1920's; in 1930:700... 2005:0; 2006:0; 2007: 3 bank failures. Therefore 72 is on the same scale as 1930. As well, had the gov't not acted late last year, we may have seen some of the largest banks ever collapse.
Stop looking at the total damage of the depression and saying that we are not as bad as then. Look at 1930 patterns, read the news articles of the time, and see the pattern that we maybe repeating. The most interesting statements I see from then was that it was nothing like the Great Depression (that was what they called the Long Depression)...the recession will end within 6-8 months....buy while the market is low....stimulus isn't needed....
One drastic difference between now and then is that beginning in 1930 the government reduced the money supply every year until 1935, leading to disastrous consequences, namely monumental deflation and the accompanying defaults and bank failures. It was not until 1939 that the money supply returned to 1929 levels, much less any additional supply of liquidity.
This is in stark contrast to the current worldwide governmental response, which has been to turn on the printing presses and flood the system with liquidity. This may cause its own collection of problems, but a duplication of the 1930's won't be one of them.
In fact, we're likely to have the nominal value of everything --stocks, commodities, etc.-- escalate to reflect the new supply/demand situation between currency and other assets. This may not represent much real growth, adjusted for inflation, but the price of all assets, stock indices included, is meaured in nominal terms. It would seem, from the foregoing, that the only way we can see radical new lows for stock and asset values is if monetary velocity falls to zero, which could not reflect any plausible supply/demand situation, but would have to be a new fabricated hysteria of some sort.
For what I consider a very good overview of the actual situation, now, and a review of how we got here, please see: www.forbes.com/2009/06...
On Jul 03 08:50 AM Seanlbrennan wrote:
> Tack,
> There were 70 bank failures per year in the 1920's; in 1930:700...
> 2005:0; 2006:0; 2007: 3 bank failures. Therefore 72 is on the same
> scale as 1930. As well, had the gov't not acted late last year, we
> may have seen some of the largest banks ever collapse.
>
> Stop looking at the total damage of the depression and saying that
> we are not as bad as then. Look at 1930 patterns, read the news articles
> of the time, and see the pattern that we maybe repeating. The most
> interesting statements I see from then was that it was nothing like
> the Great Depression (that was what they called the Long Depression)...the
> recession will end within 6-8 months....buy while the market is low....stimulus
> isn't needed....
Suppose your system had been set up in the 1930s. In September 2008, when Paulson panicked, people would have wanted to move their money from zero-reserve accounts to 100% reserve accounts. All at once. Then what?
On Jul 03 07:53 AM Tack wrote:
> Banks closed since 2008 - 72
> Banks closed during recent S&L crisis - 1300+
> Banks closed during the Depression - 9000+
>
> This "worst crisis since the Depression" isn't even even a blip on
> the above radar screen.
>
> Whether it's just our age, or the addition of the Internet to media
> distribution, we seem to live in the land of exponential media hyperbole.
>
>
> As with all pullbacks, we'll survive this one, and we'll recover.
> And, the investors who can see past the negatively-hyped news and
> assess the genuine data and facts will be well rewarded for their
> efforts.
Pessimism always abounds at bottoms, and those that embrace it rarely make money.
On Jul 03 10:49 AM wheelbarrelsofcash wrote:
> Worthless post considering that the 20 banks with the majority of
> deposits have been deemed "to big to fail" -more importantly what
> was the worldwide total of derivatives during the Great Depression
> os S&L crisis?
You seem to be arguing that hyperinflation will save us by making the stock market rise. We won't have more money (because everything will cost more) but we will THINK we do because the DOW is at 20,000. Hooray?
Also your phrase "new fabricated hysteria" implies that the biggest problem of the last year was not actual implosion of leveraged risks and the subsequent deleveraging of households (when their imaginary ATM's blew up), but an artificial hysteria ("the only thing we have to fear is fear itself").
Confidence is important for markets, to be sure. But sometimes people are pessimistic because they have actual reasons to fear the future (or possible outcomes in the future).
On Jul 03 10:19 AM Tack wrote:
> If you reply is meant to suggest that we're on course for the 1930's,
> but we're just a bit early, then, I just don't buy it.
[...]
> In fact, we're likely to have the nominal value of everything --stocks,
> commodities, etc.-- escalate to reflect the new supply/demand situation
> between currency and other assets. This may not represent much real
> growth, adjusted for inflation, but the price of all assets, stock
> indices included, is meaured in nominal terms. It would seem, from
> the foregoing, that the only way we can see radical new lows for
> stock and asset values is if monetary velocity falls to zero, which
> could not reflect any plausible supply/demand situation, but would
> have to be a new fabricated hysteria of some sort.
>
>
>
>
>
But, now, is not that time. Now, is when one make smoney by embracing risk and tuning out fear.
I make my comments from the perspective of an investor, not a booster or critic of governmental policy. Heaven knows there are reasons to be critical of the government's original actions (lack of regulation, too-low interest rates, etc.) that caused the problems and their proposed solutions (massive governmental boondoggle spending, higher taxes, etc.) that won't, in fact, have much impact on a recovery.
A recovery we will have, nonetheless, because the private sector is still better off than most pundits believe. Banks, in particular, have the highest cash and cash equivalents in history, and all this cash was added -- via government, private capital raises, increased bank deposits-- to make up for paper losses, i.e., GAAP writedowns of mortgages, etc., that haven't actually been realized at anything remotely approaching the mark-to-market valuations. So, paper, unrealized losses were replaced with real money, ergo the cash bonanza.
The recovery will be slow and hesitant and much ado will be made of short-term unemployment rates (as we saw just yesterday), but, they are the laggiest of laggy indicators and mean little, in fact. The economy will be controlled by the behavior of the 90% with jobs, not the 10% without.
Yes, absolutely, we will have inflation down the road, maybe sooner than some believe. But, the reality is that one must plan and invest for the increased nominal market and commodity-price values that you mention. It doesn't matter whether that was "good policy;" it's the policy we have and will produce predictable effects.
It's better to ride the nominal values up than to hunker down waiting for the world to end (it won't; never does) and be left at the gate as the market climbs the "wall of worry" and when that inflationary effect imposes itself, additionally, on everything, the market included.
On Jul 03 12:20 PM Dialectical Materialist wrote:
> Tack,
>
> You seem to be arguing that hyperinflation will save us by making
> the stock market rise. We won't have more money (because everything
> will cost more) but we will THINK we do because the DOW is at 20,000.
> Hooray?
>
> Also your phrase "new fabricated hysteria" implies that the biggest
> problem of the last year was not actual implosion of leveraged risks
> and the subsequent deleveraging of households (when their imaginary
> ATM's blew up), but an artificial hysteria ("the only thing we have
> to fear is fear itself").
>
> Confidence is important for markets, to be sure. But sometimes people
> are pessimistic because they have actual reasons to fear the future
> (or possible outcomes in the future).
>
> On Jul 03 10:19 AM Tack wrote:
One should take care of the downside because the upside will take care of itself. This means a whole lot of caution and pessimism for now. There will only be more partial stick saves in the future to prop up the banking system instead of revealing, even indirectly, the depth of its insolvency.
On Jul 03 11:06 AM Tack wrote:
> Those "too-big-to-fail" banks have just raised $80B in private capital
> in just a few weeks. I guess all those high-end investors just can't
> see the unavoidable calamity ahead.
>
> Pessimism always abounds at bottoms, and those that embrace it rarely
> make money.
This is an interesting debate, and I am sure we go go on for days. I'll leave you with a question, rather like the one about "if tree fell in the woods, and nobody heard it, would it have made any noise:"
If nobody were willing to pay a single dime for anybody's mortgage paper on the banks' books, but the vast majority of the customers given these mortgages were amortizing them on schedule, would
the mortgages be worth their typical discounted-cashflow, reserve-adjusted, actuarial values or would they be worth zero?
Much of the entire debate about banking solvency and future prospects hinges on this question.
On Jul 03 02:06 PM User 401674 wrote:
> If by "raised" you mean used creative but nefarious, not to mention
> immoral, ways for banks to channel TARP and other monies to attempt
> to stabilize themselves then I'll agree with you. Besides, $80 billion
> is not nearly enough to capitilize banks in the long run, and while
> this recession will not unfold in the exact same way as the Great
> Depression it is far from over with enough of its own metrics to
> testify to its severity. Lastly, a lot of the money injected into
> the banking system has not made it into the economy as it first needs
> to prop up the massive losses the US banking system has suffered
> so inflation, while in the cards for the future, is currently trumped
> by deflation due to deleveraging.
>
> One should take care of the downside because the upside will take
> care of itself. This means a whole lot of caution and pessimism for
> now. There will only be more partial stick saves in the future to
> prop up the banking system instead of revealing, even indirectly,
> the depth of its insolvency.
>
> On Jul 03 11:06 AM Tack wrote:
www.wealthalchemist.co.../
On Jul 03 01:46 PM Tack wrote:
> Look, the time to be defensive (pessimistic, if you will) was when
> the spx was at 1500, and the radio was blaring advertisements for
> no-doc, 125% LTV mortgages. Yes, this was the time to hunker down,
> short the market, pull the manhole cover over your head.
>
> But, now, is not that time. Now, is when one make smoney by embracing
> risk and tuning out fear.
>
> I make my comments from the perspective of an investor, not a booster
> or critic of governmental policy. Heaven knows there are reasons
> to be critical of the government's original actions (lack of regulation,
> too-low interest rates, etc.) that caused the problems and their
> proposed solutions (massive governmental boondoggle spending, higher
> taxes, etc.) that won't, in fact, have much impact on a recovery.
>
>
> A recovery we will have, nonetheless, because the private sector
> is still better off than most pundits believe. Banks, in particular,
> have the highest cash and cash equivalents in history, and all this
> cash was added -- via government, private capital raises, increased
> bank deposits-- to make up for paper losses, i.e., GAAP writedowns
> of mortgages, etc., that haven't actually been realized at anything
> remotely approaching the mark-to-market valuations. So, paper, unrealized
> losses were replaced with real money, ergo the cash bonanza.
>
> The recovery will be slow and hesitant and much ado will be made
> of short-term unemployment rates (as we saw just yesterday), but,
> they are the laggiest of laggy indicators and mean little, in fact.
> The economy will be controlled by the behavior of the 90% with jobs,
> not the 10% without.
>
> Yes, absolutely, we will have inflation down the road, maybe sooner
> than some believe. But, the reality is that one must plan and invest
> for the increased nominal market and commodity-price values that
> you mention. It doesn't matter whether that was "good policy;" it's
> the policy we have and will produce predictable effects.
>
> It's better to ride the nominal values up than to hunker down waiting
> for the world to end (it won't; never does) and be left at the gate
> as the market climbs the "wall of worry" and when that inflationary
> effect imposes itself, additionally, on everything, the market included.
>
>
> On Jul 03 12:20 PM Dialectical Materialist wrote:
On Jul 03 03:11 PM Tack wrote:
> "Raised: means they 21 "stress-test" banks have raised over $80B
> in real money from real porivate investors, not some sleight-of-hand
> TARP, or other meachanism. In fact, the banks are standing in line,
> all trying to rid themselves of TARP as soon as they are able. Some
> have already.
>
> This is an interesting debate, and I am sure we go go on for days.
> I'll leave you with a question, rather like the one about "if tree
> fell in the woods, and nobody heard it, would it have made any noise:"
>
>
> If nobody were willing to pay a single dime for anybody's mortgage
> paper on the banks' books, but the vast majority of the customers
> given these mortgages were amortizing them on schedule, would
> the mortgages be worth their typical discounted-cashflow, reserve-adjusted,
> actuarial values or would they be worth zero?
>
> Much of the entire debate about banking solvency and future prospects
> hinges on this question.
>
> On Jul 03 02:06 PM User 401674 wrote:
On Jul 03 03:11 PM Tack wrote:
> "Raised: means they 21 "stress-test" banks have raised over $80B
> in real money from real porivate investors, not some sleight-of-hand
> TARP, or other meachanism. In fact, the banks are standing in line,
> all trying to rid themselves of TARP as soon as they are able. Some
> have already.
>
> This is an interesting debate, and I am sure we go go on for days.
> I'll leave you with a question, rather like the one about "if tree
> fell in the woods, and nobody heard it, would it have made any noise:"
>
>
> If nobody were willing to pay a single dime for anybody's mortgage
> paper on the banks' books, but the vast majority of the customers
> given these mortgages were amortizing them on schedule, would
> the mortgages be worth their typical discounted-cashflow, reserve-adjusted,
> actuarial values or would they be worth zero?
>
> Much of the entire debate about banking solvency and future prospects
> hinges on this question.
>
> On Jul 03 02:06 PM User 401674 wrote:
Typically, the investors, who didn't see the looming meltdown and got whacked are the ones that, after all the worst losses have been realized, decide that the worst is yet to come and prepare for the Armageddon that doesn't arrive.
The present situation with financials enjoys many parallels with the energy panic after Enron, when almost every energy company and utility in America was shorted to 10-20% of their values. The end of the world was nigh, of course, but the savvy buyers, who snapped up depressed shares, made a huge killing in the inevitable recovery.
The current situation is very similar, only the sector and names have been altered.
On Jul 05 05:10 PM Tack wrote:
>
> Typically, the investors, who didn't see the looming meltdown and
> got whacked are the ones that, after all the worst losses have been
> realized, decide that the worst is yet to come and prepare for the
> Armageddon that doesn't arrive.
>
> The present situation with financials enjoys many parallels with
> the energy panic after Enron, when almost every energy company and
> utility in America was shorted to 10-20% of their values. The end
> of the world was nigh, of course, but the savvy buyers, who snapped
> up depressed shares, made a huge killing in the inevitable recovery.
>
Here's a further thought on how to play the current market:
seekingalpha.com/artic...
P.S. You can add exchange-traded debt issues to the list.
On Jul 05 05:33 PM Dialectical Materialist wrote:
> Tack, I agree with you that there is a lot of money to be made for
> those bold enough to put some smart money into the market, providing......
The core problem of the United States' banking system (and maybe the world's banking system) is not liquidity but insolvency. The liabilities of the United States' banking system exceed the value of its assets. The issue is not only the toxic assets (toxic mortgage backed securities, toxic commercial real estate loans, sub-prime mortgages, alt-A loans, adjustable loans likely to go bust, increase in prime mortgage default rates, etc) but also off-balance sheet liabilities (such as expected huge unaccounted for future derivatives losses).
This means that bailouts are just beginning and will require bigger and bigger sums of taxpayer money as time goes on. The government will resort to borrowing more and more and eventually to printing money when treasury debt auctions start failing. The end result of this path is a currency collapse and probably total chaos as expected by gold bugs.
One other way to deal with this issue is to stop the bailouts and let the dominoes fall. Defaults and cross-defaults will cause many, many depository institutions (even very large ones) to collapse leading to extreme decrease in money supply as bank deposits are destroyed. Deposits of failed banks cannot be used to pay bills, make purchases and/or service debts.
Which will probably lead to even more defaults as unemployment increases and debtor's are unable to service their debts. This process will probably cause extreme deflation as businesses lower prices in a bid to survive. This will also lead to wage cuts, increased unemployment and a deflation spiral and much chaos. But probably less chaos than a currency collapse.
Is there a better way?
Here is my idea:
1) We essentially need an orderly bankruptcy and liquidation of the United States' financial system.
2) I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This "transfer" is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the FED.
3) Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
4) All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
5) After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have "free banking" from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
6) The new government bank will act as an electronic "piggy bank" only. All deposits will be 100% reserve and it will not make any loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government owned bank exists only as a "safe" money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
7) Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
8) We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).
Mansoor H. Khan
aquinums-razor.blogspo.../
On Jul 03 02:19 AM johngonole wrote:
> Mansoor,
>
> You took the words right out of my mouth. I have stated several
> times in different places on seeking alpha that fractional reserve
> banking deserves a challenger. If we look at the overall net damage
> the bankers have costs this country (for example I'm told that with
> all the bail outs and govt deficit spending to cure the economy)
> that my share of the national debt is going to rise around 50-60,000.
> I may be collecting small interest payments on my checking accounts
> but how much am I really losing. Banks over the long term don't
> really seem to be able to lend money safely. Overall the common
> people are losing their ass while those who received the loans only
> to seek the protection of bankrupcy laws have made out (see they
> usually buy expensive houses in Florida before declaring bankrupcy).
> The bankers have made out quite well also.
>
> I'd be willing to bet that people to people loans with a lawyer drawn
> up contract have a better chance than the loans the banks make.
> I'd even bet that if individuals could sell personal (IOU's) bonds
> in the stock market or bond markets (after disclosing all financial
> info as well as collaterall) could do a better job than the banks.
> I mean they've lost billions and billions. They are playing with
> other peoples money and they don't care whether they succeed or lose
> because they control the purse strings of the politicians.
>
> Banking is the most corrupt business ever devised by man. The vast
> majority of us only deposit our money in the bank for storage and
> transactions. We don't place it their because we want the banker
> to loan out the money with a no doc no ID loan.