Your money is guaranteed by your government…
Governments and financial authorities are desperate to come up with good ideas that will put a lid on the crisis. Meanwhile the public is increasingly concerned about their money, what will happen with their savings, will their bank survive the crisis? Is it perhaps better to withdraw the money from the bank, and do something else with it to preserve the value of it? If everybody goes to the bank all at once to withdraw their money, then the banks will have a huge problem. They simply don’t have the cash to give everybody their money back. The banks have maybe 5% or so in cash of the total amount outstanding. To prevent this problem, several governments recently raised the amount they are guaranteeing if a bank fails, hoping people don’t withdraw their money. Some countries took it to the extreme and told us the guarantee is now unlimited. The question is if governments have the money for it.
The answer is no. Take a look at the US, part of last week’s bailout package is the raise of the US Federal Deposit Insurance Corporation (FDIC) insurance to $250,000 per person per bank. That sounds really nice, the FDIC will pay you back when your money is gone in case your bank fails. But, how much money is insured and how much money can the FDIC actually pay? The gap turns out to be really big, the FDIC is now insuring more than $5 trillion, but has only $45 billion in its insurance fund, less than 1%. What will happen if more banks fail and the $45 billion is gone? The government has two not so great choices. The first one is raising taxes. This way the people pay for their own money they get back from the government, so it’s not really helping…
The second choice is probably the government’s favorite, just let the Fed print more money. The people who lost their money get paid, but by increasing the amount of money in circulation the money will be worth much less. This will create more problems for the banking system, more banks will fail, more people need to be paid by the government, more money is printed and the cycle repeats. In the end your money will be worthless.
While governments and financial authorities try to convince the public they should trust the banks, to prevent a bank run, the banks themselves don’t trust each other at all, that’s why the financial system freezes up globally. If other banks don’t trust my bank, is it a good idea to believe the government I can trust my bank knowing I will probably pay myself the money in the long run that I get back from the government, or the money I get back will be worthless in the end due to inflation, in case my bank fails? I cannot answer this question for you, it’s your money, so you decide…
Talking about distrust between the banks, the coordinated lowering of interest rates by the central banks yesterday didn’t have much effect at all. The Libor, an important rate banks use when lending money to each other, went up today again. Clearly, banks still don’t trust each other.
Today the European Central Bank (ECB) is offering loans in dollars worth a record high of $100 billion. They lowered the interest rate dramatically, from 9.5% yesterday to 5%.
The action of the central banks yesterday was really an unprecedented event, but right now every day something seems to happen we haven’t seen before, like the record high loan of the ECB today, as desperation takes over more and more. One cannot help to think how long this can last before a true collapse will happen.
The UK government also guarantees savings, up ’till a few days ago I believe it was only £35,000 (now £50,000).
A few months ago I heard that the money that gets set-aside in case a bank does go down was nowhere near enough to cover even one of the major high street banks.
It’s scary to think what would happen if even more banks go down the pan.
Maybe governments guaranteed money but the question is for how long? I think we need a good revision for what’s going on because I’m afraid that we can face a situation worse than the 1930’s depression and this shall affect us worldwide.
We don’t know what will happen in the future, but I’m afraid we already passed the point of no return. “They” are trying all the tricks they can come up with right now to improve the situation, but it all fails and the crisis is actually deepening, despite the trillions the taxpayers worldwide have to pay for it in the future.
We have to brace ourselves for a period of severe economic downturn if things don’t improve fast. The population in most western countries will get poorer, governments should stop spending borrowed money on “saving” the financial system, instead the money should be used at a later date to help the people who will suffer the most and to finance well thought out incentives to the economy so the period of depression is as short as possible.