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!




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