Saturday, April 9, 2016

When Banks Fail & Bubbles Bust

 March 12, 1933 — newly elected President, Franklin D. Roosevelt (with the U. S.  stuck in the depths of the Great Depression), in effect immediately began restoring public confidence by proclaiming a bank “holiday” and speaking openly to the American public in what became a series of radio broadcasts or “fireside chats.”   In that first fireside chat, Roosevelt spoke of the bank crisis of the past several years and explained his logic behind the closing of all U S banks for holiday and stated that “Your government does not intend that the history of the past few years shall be repeated. We do not want and will not have another epidemic of bank failures.”

Considering that he had taken the oath of office only thirty-six hours before declaring the bank holiday, — for the most part, there was surprisingly little panic.  You see, at 1:00 a.m. on Monday, March the 6th Roosevelt issued a proclamation ordering the suspension of all banking transactions—so for a full week, Americans had no access to banks or banking services. They couldn’t withdraw or transfer their money, or even make deposits.   

Technically, the crisis had begun to subside by March 9th (3 days latter), when Congress passed the Emergency Banking Act. On March 13, only four days after the emergency legislation went into effect, member banks in Federal Reserve cities received the go-ahead to reopen. By the 15th, banks controlling 90% of the nation’s banking establishments had re-opened and deposits far exceeded withdrawals. The bad news — the coming economic recovery was still years away. The good news — the worst of the banking crisis appeared to be over.

The fact is, the United States has had to deal with a number of banking disasters during its history as a nation; the major ones include The Panic of 1819, 1837, 1873, The Panic of 1907; the Great Depression; the Savings and Loan crisis of the 1980s & '90s; and the financial crisis of 2007-2009; okay, the list goes on and on.

By far the worst Panic occurred during the Great Depression. Within the first 10 months of 1930, 744 US banks closed forever. In November and December of that same year, 600+ more banks failed. By the time the banking crisis was over 4000 banks had failed and never re-opened—over 5,000 more failed but did manage to re-open.

As a result, the FDIC (Federal Deposit Insurance Corporation) was created by the Glass-Steagall Act of 1933.  The basic idea behind forming the FDIC was to provide deposit insurance which would guarantee the safety of deposits in member banks, up to a certain amount which currently stands at $250,000 per depositor — per bank.

If you’re wondering if it works, be aware that since the establishment of the FDIC no depositor has ever lost a penny of insured deposits since its creation. Look for the FDIC official sign that’s proudly posted at every insured bank and savings association across the country.  

If you’re still having concerns it might help to know that the FDIC’s deposit insurance fund consists of premiums already paid by insured banks and interest earnings on its investment portfolio of U.S. Treasury securities. So NO federal or state tax revenues are involved.

Although banks are not required to be FDIC insured, a bank that is not FDIC insured cannot compete effectively in an industry where consumers have come to expect their money to be protected.
Of recent date (March 2016) many segments of the News Media have showcased several “economists” and “politicians” who are foretelling a repeat of early 20th century America’s banking crisis and stock market crash by predicting a “Bubble Burst” that is more often than not forecasted as being the worse ever.   A Bubble Burst, you see are the 21st Century’s terms for “Market Crash” and “Bank Failures”. Fact is, a Bubble Burst will cover just about any crisis in most any arena.  There’s the housing bubble, the dot-com bubble, the stock market bubble, the banking industry bubble, bond market bubbles, U S municipality bubbles, the tech industry bubble, et cetera, et cetera, et cetera.

When bubbles burst (and they do more often than you might think), two key things separate winners from losers: Timing and the debt level. Timing matters because the losers, who are already strapped for cash, end up selling their assets such as their home after values fall and before prices rebound. Winners on the other hand can wait longer because they have a lower debt level and thus are able to keep their assets (home, etc.) until values recover and ultimately break-even or actually show a gain in capital.

In any event, exactly what is a bank failure? In the simplest of terms it can be described as the closing of a bank by a federal or state banking regulatory agency, usually when it is unable to meet its obligations to depositors and others.  This is only true when the bank’s failure involves an institution that’s insured by the FDIC; in that circumstance the FDIC acts in two capacities. First, as the insurer of the bank's deposits, the FDIC pays insurance to the depositors up to the set insurance limit of $250,000.00.   Second, the FDIC, as the “Receiver” of the failed bank, assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits exceeding the insured limit.

Oh, and if you are concerned about that priceless heirloom you have hidden away, you'll still have access to your safe deposit box. In fact, the full contents of your box should be available to you the first business day after the bank closes in most instances.

If you’re thinking bank failures are directly related to political leaders or political parties you’re probably in the minority—just look at these recent U S bank failure statistics:

Barack Obama Years; Democrat . . . 2016 – 0 (to date 4/08/16);   2015 – 8;   2014 – 21;   2013 – 24;    2012 – 54;   2011 – 93;   2010 – 157;   2009 – 140; 2008 - 30


George W. Bush Years; Republican . . . 2007 – 3;     2006 – 0;    2005 – 0;   2004 – 4; 2003 – 3;    2002 – 11;   2001 – 4;   2000 - 7


Bill Clinton Years; Democrat . . . 1999 – 8;   1998 – 3; 1997 – 1;   1997 – 1;   1996 – 6;   1995 – 8;   1994 – 15;   1993 - 50


George H. W. Bush Years; Republican . . . 1992 – 181; 1991 – 271;   1990 – 382;   1989 - 534


Ronald Reagan Years; Republican . . . 1988 – 470; 1987 – 262;   1986 – 204;   1985 – 180;               1984 – 106;   1983 – 99;   1982 – 119;   1981 - 40

As indicated above, the worst single year for bank failures since the introduction of the FDIC came in 1989 at the height of the U S savings and loan crisis. And you’re probably be surprised to learn that only during the years of 2005 and 2006, there were zero (0) bank failures in the United States, yep, that was during the George H.W. Bush years, not his son, George W.   Nevertheless the highest number of bank failures in a single year since 1900 were 4,000 which took place way back in 1933.

So should you be worried about Bank Failures and Bubble Busts that are yet to occur? Not if you are comfortable with the home you live in and have a fixed interest rate that’s long-term and agreeable . . . in other words a stable monthly payment . . . Not if you have less than $250,000.00 in any given FDIC insured Bank or Savings & Loan Institution . . . Not unless you have significantly invested in the stock market, municipal bonds, dot-coms, et cetera.    

On the other hand if you insist upon being a “Chronic Worrywart” there is and will always be a “Gloom & Doom Report” in the media (election year or not) that can justify your concerns.

A good example is a report by William Edstrom who insists the USA is currently in a slow motion economic collapse.  The lengthy report was published September 23, 2015 in CounterPunch (click here for the entire article), a monthly magazine publication, and is titled “Waiting for Collapse: USA Debt Bombs Bursting”.  The article basically outlines how most everything in America is “going to hell in a hand basket”; an expression often used by grandpa when describing most anything “in a bad way” but before you accept everything printed in the article, you should first consider the source.

William Edstrom graduated from Columbia University with a Master’s degree in 2003. He has worked as a scientist for ten years, has co-authored publications in scientific journals such as Nature and the Journal of Biological Chemistry, and co-authored a Life Sciences textbook (Columbia University Press, 2005). He is also a member of the Educational Writers Association. Mr. Edstrom is a previous (2014) Green Party Candidate for U S Reprehensive in Congressional District 15 of New York; according to his web-site he received 568 votes or 0.9% of the 61,268 votes cast in the 2014 General Election.


CounterPunch as you may know is monthly magazine published in the United States that covers politics in a way its 2 editors describe as “muckraking with a radical attitude”.   It has been described as “left-wing” by both supporters and critics.

In-any-event, the vast majority of Mr. Edstrom’s publications in CounterPunch or otherwise are “unsettling” at best; yet another example can be found in an OpEdNews publication in August of 2015 the article is titled Debt Collapse: The Decline and Fall of the United States of America” in which he insists among other things that “when US government people claim $18.5 trillion in government debt, they are neglecting to tell us about their loans, their government credit card balances, the debts of the 50 states, the debts of 3,033 US county governments, thousands of towns and cities plus thousands of government authorities like the Tennessee Valley Authority and the New York City Metropolitan Transit Authority . . . The total of these debts owed by government in the USA is $32.77 trillion, as of March 2015”.

Perhaps Mr. Edstrom would better serve his readers by describing himself as a well informed “economist” in addition to his numerous accomplishments.  After all, if he is right, maybe we all should worry, or better yet, join the Green Party!


Monday, April 4, 2016

Decriminalizing Drugs — the Portuguese Experiment

15 Years & Counting

In 2001, the Portuguese government did something that the US Government may never bring itself to do.  After years of waging an aggressive war on drugs, it elected to reverse its approach entirely: It decriminalized them all!

As recently as the year 2000, Portugal had one of the worst problems in Europe with drugs. A whopping 1% of the population was addicted to heroin, which is kind of mind-blowing unless you live in the United States. Then Prime Minister Guterres and the leader of the opposition got together and did something really bold: They said something like, “Look, we’ve been trying the ‘American’ way. Every year, we crack down more — we put more & more people in prison, but every year the problem gets worse. Let’s do this differently.”

Here’s Differently: Since July of 2001 if anyone is found in “possession” of less than a 10-day supply of anything from marijuana to heroin, he or she is sent to a three-person Commission for the Dissuasion of Drug Addiction, usually comprised of a social worker, a lawyer, and a doctor. The “Commission” recommends treatment for the “offending” and occasionally a minor fine; otherwise, the individual is sent home.  In other words, if the drugs are for personal consumption, there is no threat of being imprisoned.

Before you get all “bent” you might want to know that Drugs in Portugal are still illegal; but the rules have changed: Users are sent to counseling and sometimes treatment instead of criminal courts and prison. The switch from “drugs” as a criminal issue to a public health issue was primarily aimed at preventing users from going underground. On the other hand, growing and selling such drugs can result in serious prison time.

Portugal’s approach and monumental success can undoubtedly be attributed to taking politics out of drugs. The leaders of the country decided to leave it up to a panel of scientists to determine what to do; then they agreed to follow through on the panel’s findings / recommendations. This included decriminalizing everything, from cannabis to crack — the nonpartisan panel also concluded that the crucial next step absolutely required spending all the money the government had been paying out for arresting drug users, trying drug users in court, and or imprisoning drug users — must instead be diverted toward reconnecting drug addicts with society so as to give them a purpose in life.

The results have been impressive by most anyone’s measure . . . Here's what happened within just the first seven years (2001 through 2008):

There were small increases in illicit drug use among adults, but decreases for adolescents and problem users such as drug addicts and prisoners.

 Drug-related court cases dropped 66%.

Drug-related HIV cases dropped 75%.   In 2002, 49% of people with AIDS were addicts; by 2008 that number fell to 28%.

     The number of regular drug users held steady at less than 3% of the population for marijuana and less than 0.3% for both heroin and cocaine — further, figures showed that decriminalization brought no surge in drug use.

The number of people treated for drug addiction rose 20 percent.

The above styled “report” findings were affirmed in April of 2009 by the Cato Institute (an American libertarian think tank headquartered in Washington, D.C.) who published an all-inclusive case study regarding the decriminalization of drugs in Portugal.  You may be shocked to learn that the data from their report indicated that “decriminalization” had no adversative effect on drug “usage rates” as you might otherwise expect. But (surprise! surprise!), drug-related pathologies such as sexually transmitted diseases and deaths, due to drug use was shown to have decreased dramatically.

More than 7 years since the end of 2008, the country has seen drug abuse drop by half. Portuguese Government officials are thrilled with the results. The logic: instead of creating harsher conditions for drug users, why not give them a way out?   Simply put, Portugal has not been run into the ground by a nation of drug addicts as many critics predicted. In fact, by most measures, the drug problem is doing far better than it was before.

Although Portugal was the first country that decriminalized the use of all drugs with favorable results, both Spain and Italy have since followed Portugal's example; but is decriminalization of drug users enough?   Who among us is bold and brave enough to cross the next bridge toward finally eliminating the problems associated with drug abuse by legalizing drugs completely?

Clearly the Portuguese Experiment has shown that the traditional approach to fighting the War on Drugs has at best been a dismal failure.  Perhaps there’s a lesson to be learned here—just maybe, the United States, which has spent more than a Trillion Dollars in pursuit of the War on Drugs, should be looking for answers in comparably tiny Portugal.

More than 3,500 miles due west, throughout the U.S., we’ve heard the phrase “War on Drugs” for more than 40 years. It started back in 1971, with Richard Nixon’s classification of drugs as “public enemy No. 1,” and offensive efforts toward its demise have escalated since to the point that many Americans are now just as afraid of a “militarized” local police force than a drug “deal gone bad”; the simple fact that this approach has had far too little success only further complicates the issues of the War on Drugs and a “storm-trooper” styled police force. 

One need only watch CNN most any hour of the day to learn that about 570,000 people die annually (47,500 each month) due to drug use.  In truth you’ll probably be happy to learn that figure is actually a bit misleading.  The 570,000 per year figure breaks down to about 440,000 from disease related to tobacco use; 85,000 deaths are due to alcohol consumption; 20,000 deaths are due to illegal drugs, but another 20,000 deaths are attributed to prescription drug abuse. So, technically only about 40,000 deaths per year or about 333 Americans die each month resulting from those drugs that are subject to the War on Drugs.  That’s right both alcohol and tobacco, although drugs, are legal throughout the majority of the U. S. landscape—as they should be.  

So why legalize “controlled substances” / illicit drugs in any case?  Perhaps the strongest and best answer is that alcohol’s Prohibition didn’t work in the U. S. in the early 20th century.  You may recall that it was “tested” from 1920 through 1933 thanks to the 18th Amendment — so, lesson learned — Right?

Beyond that, eliminating legal penalties from the production, sale and use of controlled substances / illicit drugs would alleviate at least a dozen (12) on-going social & political problems — they include but are not limited to the following:
1.     Repair U.S. relations with other countries and curtail anti-American sentiment around the world . . . Legalizing the drug trade would very likely remove more than a few of the reasons to hate Americans and deprive politicians in such localities, the opportunity to exploit them.

2.   Stabilize many foreign countries and make them a safer place to live and or travel in . . . Legalizing drugs would definitely affect organized crime and subversion abroad as much as it would in the U. S.   A major source for “guerrilla” funding would be “no more” as would the motive for kidnapping or assassinating officials and private individuals, including those U. S. citizens visiting foreign lands.

3.   Legalization would lead to the termination of the loss of civil liberties . . . e.g. far too many corporations and government entities are now using the drug abuse theme to justify testing their employees for drug use; even those among us suffering from chronic pain; although such individuals must turn to prescription drugs so as enable them to function normally among their peers — they are more often than not, treated as illicit drug addicts.

4.  Legalization would reduce the spread of AIDS and other diseases . . . used or borrowed needles would no longer be deemed a way-of-life for many drug addicts.

5.   Common sense dictates that legal drugs would be safer . . . because it’s illegal; the drug trade today lacks many of the consumer safety features common to other markets such as simple instruction sheets, warning labels, and manufacturer accountability. While drugs remain illegal, society is ultimately forcing drug trade “underground”— this actually makes the use of drugs, more dangerous than they need to be.   No-one denies that in the current format regarding illegal drugs is dangerous, but so can aspirin or even table salt if used improperly.

6.  Organized crime would be crippled . . . the Mafia (heroin), Jamaican gangs (crack), and the organizations like the former Medellin Cartel (cocaine) stands to lose Billions of Dollars in drug profits from legalization.  Bottom line — members of organized crime, stand to lose the most from legalizing the drug trade.

7.     Legalization would save tax dollars . . . think in terms of the cost of “trying” (in court) and “incarcerating” users, traffickers, and those who commit crime to pay for their drugs — the tab runs well above $10 Billion a year.  The crisis in inmate housing would fade away, saving taxpayers the expense of building more prisons in the future.

8.     Reduce official corruption . . . Drug-related police corruption (not to mention many elected officials who routinely join the league of corruption) generally takes one of two major forms:  a. Police officers offer drug dealers protection in their districts for a share of the profits (or demand a “share” under threat of exposure). Or b. They seize the local dealer's merchandise to peddle themselves—a practice perfected during U. S. Prohibition years ago.

9.   Unclog the court system . . . When accused of a crime; it takes months to get to trial. Guilty or innocent, you must live with the anxiety of an impending trial until the court case finally begins.

10.          Drug legalization would “clear the way” for police assets to battle crimes against people and property . . . Substantial efforts are now expended against drug activity and drug-related crime; drug legalization  would allow “redirection” of such efforts toward protecting innocent folks from those who continue to commit crime in the absence of illegal drug laws.

11.           Eliminate prison overcrowding . . . Prison overpopulation is a grim & persistent problem. To start with, overcrowding makes the prison environment, violent, faceless, hazardous, and dehumanizing.

12.       Legalizing drugs would make our homes and streets safer . . . Speculative and statistical links between the illegal drug trade and crime are well established.

Okay, so beyond a few “social” issues and the dismal failure toward stopping the sale and use of alcohol via the Prohibition Amendment; what  other reasons justify the abandonment of the status-quo in regard to the War on Drugs?

If the goal is to curtail damage — to folks here in the U. S. and abroad — the right policy is to legalize all drugs, not just marijuana as was done by Colorado and Washington in 2012 who if you’ve been living under the proverbial rock the last few years, legalized marijuana under state law for recreational purposes.

In truth, many legal products cause serious harm, even cigarettes. Case-in-point, in recent years, about 40 people a year die as a result of: Skiing or snowboarding accidents; nearly 800 folks are killed every year resulting from bicycle accidents; several thousand from drowning in back yard and public swimming pools; more than 30,000 of us die annually from auto accidents; and as noted above 85,000 deaths per year are due to alcohol consumption and a whopping 440,000 from disease related to the use of tobacco products — Yep, they’re all perfectly legal!   

On the other hand as referenced above about 20,000 folks die every year in the U. S. as a direct result of using illicit drugs but there’s another 20,000 deaths every year from doctor prescribed pharmaceutical medications—the latter of which are legal too.

Scarce are folks who even imagine banning such deadly yet legal products (snowboards, bicycles, cars, etc.), mainly because while harmful when misused, they provide substantial benefit to most folks who use them in most circumstances. The same circumstance holds for the hardest of illegal drugs.

Yet millions of folks risk arrest & incarceration; condone inflated prices & product impurities, in conjunction the whims of black markets in general to purchase these illegal products; suggesting that people do derive significant benefits from their use, regardless of what non-users think.

An Economics 101 basic: Prohibiting a product does not eliminate the market for that product! Yes prohibition may shrink the market, but “wholesale” costs and therefore “retail” prices will rise, even under strongly enforced prohibitions.   A significant black market for a prohibited product invariably emerges in which production and use continues to grow. Plus such black markets generate dozens of unwanted side effects such as violence that buyers and sellers are unable to resolve — disputes are apt to arise; a situation the has long since been resolved with courts, lawyers, or arbitration as opposed to guns, knives, and explosives.

Item # 8 above in the social & political problems listed deserves re-visiting in that Black markets generate huge opportunities for corruption, since participants have a greater incentive to bribe police, prosecutors, judges, and prison guards.

What's more, illegal drug enforcement encourages violations of civil liberties, such as no-knock warrants (which have killed dozens of innocent bystanders) and racial profiling (which generates many more arrests of blacks than whites despite comparable drug use rates).

The cost for enforcing the ban against the production and sale of illegal drugs in the U. S. alone exceeds one (1) Trillion Dollars to date; plus it means the government can't collect taxes on drugs sold in the Black Markets; estimates suggest the U.S. governments (federal, state, & local) could improve their budgets by at least $85 Billion every year by legalizing — and taxing — all drugs.

Taking everything into consideration, in a free society, the presumption is that individuals, not government, get to decide what is in their own best interest. But perhaps the best reason to legalize all drugs is that folks who wish to consume or use them have the same liberty to choose their own well-being as those who consume alcohol, marijuana, tobacco products, or anything else!