Thursday, June 14, 2012

Your Bank is Bankrupt

I'm sorry to inform you of what you could figure out for yourself, if you put together the basic economics you were hopefully taught in high school.

There is a 99% chance that your bank is bankrupt. The same goes for any other deposit and lending institute you patronize. And if your bank existed before you were born, then it was bankrupt then, too. That is true because of the practice and policy of fractional-reserve lending.

For example, banks lend out ten-times what they have taken as deposits. So for every 1 dollar that a bank takes as a deposit, that bank lends out an additional 9 dollars. 

I'm not against fractional-reserve lending as a practice. It was done privately among Dutch (hopefully, I've got the nation right) goldsmiths, and they seemed to have done fine with the method.

A goldsmith knew the risk that depositors might show up one day with receipts for more gold than the goldsmiths had on hand. Either the goldsmith had insurance, backing from other goldsmith to cover a shortage, or an escape plan. The depositors knew that they had to trust the goldsmith. Were the depositors wise to fractional-reserve lending? Maybe, not at first, but that was the risk of putting ones commodity in another's hands.

What does bother me is this: With government backing, banks are allowed to exist in a condition that is insolvent. Banks cannot even satisfy the return of deposits to 20% of their depositors (Of course, they could get maybe that much from the Fed, which they can turnaround and lend about 8-times that amount, once they satisfy "calls" on deposits. But the Fed might balk at 30%.). The Federal Deposit Insurance Corporation (FDIC) does "insure" each account for $100,000 (Oops, that was raised to $250,000 in 2008. Current depression - er, recession, er downturn, er collapse - fueling bank run fears?). But no private insurance company would take such risks of insuring businesses that are so close to failure.  A private insurance company would risk going bankrupt itself. 

No, only a government "corporation" with unlimited supplies of tax revenues and manufactured money could back such insolvency. And in the end, citizens of the United States - and the world - will pay, when inflation responds to all that extra money.

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