FDIC (insolvency)

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system by:

* insuring deposits,
* examining and supervising financial institutions for safety and soundness and consumer protection, and
* managing receiverships.

According to Kevin McElroy:

Right now the FDIC insures around $4.5 trillion of banking reserves. That’s the money you and I count as “safe” when we deposit it in almost any American bank account.

The actual truth is they insure this $4.5 trillion with just $10.4 billion. That $10.4 billion came directly from the FDIC-insured banks themselves – meaning that it’s an indirect tax on deposits paid by depositors.

Doing some quick math, we can see that $10.4 billion goes into $4.5 trillion 432 times. So essentially, the FDIC insures every $432 of deposits with one lonely dollar. That’s two-tenths of 1% worth of insurance! It’s not hard to imagine a circumstance where that paper-thin cushion gets wiped out.

The FDIC currently insures 8,153 banks. So far this year, 81 have failed – or 1% (in 2007, just three failed). And there are another 416 banks on a watch list. What happens if another 1% fails – or if even two-tenths of 1% fail?

Well, the FDIC has a reinsurer of its own, sort of. It’s called the U.S. taxpayer, backed by the full faith and credit of the Fed’s printing presses. If they can’t tax us enough, they’ll backstop the FDIC with newly created dollars – the very definition of inflation.

Rising defaults among residential subprime mortgage borrowers caused the implosion of major money centers over the last 3 years, catalyzing a string of bank bailouts. Prime borrowers are also defaulting in record numbers due to resetting of Option ARM loans. Commercial real estate loan interest rates will also reset starting next year, instigating a bust in that sector as well.

Regional banks will fail because they lend to the commercial real estate markets, but they won't receive bailouts, as they aren't "too big to fail." And fail they will, further dwindling FDIC reserves. The FDIC itself is insolvent, and will require the US Treasury to bail them out.

And round and round we go. More printing of dollars will be needed to shore up our banking system. The back stop to the banking back stop will be the US tax payer. To make matters worse, not only will taxes increase, but inflation will further decrease consumer purchasing power due to US Dollar debasement.

Hello gold and silver.