Troubles With the FDIC Trust Fund and How a Fractional Reserve Banking System Work

Since the recent financial calamity, I have come across some very interesting, little-known facts about the banking system within the United States. Just about everyone is under the impression that any deposits made to an FDIC member bank are 100% backed in good faith and credit by the Federal government of the United States. The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation as a temporary government corporation which gave the FDIC the authority to regulate and supervise state non-member banks. It extended federal oversight to all commercial banks for the first time, and originally prohibited banks from paying interest on checking accounts. These actions were in response because over 9,000 banks failed during the Great Depression. The intent was simply to restore faith in financial institutions and limit the run on banks.

Almost 75 years later, the idea of running to your local bank and demanding your deposits back seem ridiculous. The financial markets within this country aren’t that of a third world country, right? We have a system built on transparency, accountability, information aggregation, and price determination. All the while it is safely monitored by the super efficient Federal Government. Institutions like the OCC and SEC reassure us that our money is safe from others and ourselves. The FDIC rescued 16 failing banks in 2008. Within the first two months of 2009, the FDIC rescued 26 failing banks. These banks have negative balance sheets mostly due to bad real estate investments.

Kick ‘em while they’re down. It is expected to exhaust the $65 billion fund set aside for bank failures. Recently the FDIC announced that it will have to increase the cost of its annual premium for member banks in order to raise capital for future bank closures. This additional pressure upon smaller banks will create further burden on banks that may have borderline healthy balance sheets. "Taxing the banking industry with a special assessment of this magnitude, when they are already under siege, will have a negative impact on their lending capacities," said John Reich, a member of the FDIC board. This additional pressure can be compared to the Fed increasing its reserves amid the start of a recession like 1931.

The video below summarizes Modern Money Mechanics of a fractional Reserve Banking System.
This article titled FDIC Insurance Trust Fund – It Doesn’t Actually Exist discusses potential pitfalls regarding the FDIC trust Fund.

Polar Opposite Attitudes Towards Taxation and It's Effects the on Economy

I came across an article by Amity Shlaes, author of The Forgotten Man and an article by Fred Hiatt of The Washington Post. Both do a pretty good job deconstructing Reagan's tax strategy versus Obama's spend-then-tax philosophy.

Fattening the Beast: Obama's Twist on a GOP Budget Strategy: by Fred Hiatt

Reagan Recipe on Fed, Taxes Spells Path From Funk: Amity Shlaes

The author (Shlaes) can't resist mentioning Obama's planned economy without the Statist's economic demi-god; John Maynard Keynes. For half a century, presidents have, knowingly or not, leaned on one line from John Maynard Keynes justifying a larger role for government. “Moderate planning,” Keynes said, “will be safe if those carrying it out are rightly oriented in their own minds and hearts to the moral issue.”

It reminded me of another quote of Keynes that I found in, of all places...Hayek's The Road to Serfdom...

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas”

I wonder what Keynes would think of the idea of a THIRD stimulus package (I say third because Bush's tax rebates were considered the first, immediate stimulus followed by Obama's stimulus plan). Is the void of private capital efficiently being filled by government involvement?

- N.C. Wilcox

Americans Threshold for Pain and Politicians

I came across two important quotes this 4th of July weekend. One quote is from Patrick Henry, the first governor of the State of Virginia, and the second is from Thomas Jefferson, whom most likely doesn’t require an introduction.

“The Constitution is not an instrument for government to restrain the people, it is an instrument for the people to restrain the government-lest it come to dominate our lives and interests. “ - Patrick Henry

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them” – Thomas Jefferson

The Road to Hell is Paved. Even as early as the 1930s scholars, such as F.A. Hayek, noticed that Western democracies slowly began to ignore the concept of a constitutional society. Legislation was passed under the pretext of social justice, but it really was just serving the need of special interests, while slowly eroding personal liberties.

Have things really changed all that much? New bills are constantly thought up and often rushed through the process ending up as laws. The process is often so confusing and frustrating for the average person; it becomes easier to ignore. A majority of these laws are written by attorneys representing special interest groups with an obvious agenda. If it is not packed with thousands of earmarks and incentives to a legislator’s most-likeable constituent, there is the rare chance that the bill serves a necessary function.

Even bills that are created for a meaningful reason, involve little spending and are approved by legislators, become the target of amendments that are unrelated to the topic. These actions occasionally force members of Congress to approve bills they normally wouldn’t vote on.

Consider the last spending bill introduced by the Congress. There were over 9,000 earmarks within that bill and there was no way every, or any, member of Congress had the time to read and reflect on such a bill. Even President Obama regarded the bill as “imperfect”. We currently have a Congress (that only serves by the grace on their constituents, I might add) with limited accountability and not one Congressman has confessed they have actually read the entire stimulus bill.

Quick Fact: Citizens of Boston were faced with the idea of a 3% tax on tea and taxation without representation; it sparked a revolt leading to the Revolutionary War. Today, in the State of New York, some individuals are taxed at over 50%of their income.

Some people may read into that statement and think I’m calling for a revolt against our Federal government. I’d simply like to know, to what degree of infringement will lead to modern-day Americans taking to the streets and informing our elected officials they work for our interests? How apathetic can we become? Will it take an American Idol Tax?

Milton Friedman Reminds Us Why Self Interest is Important

New Era of Commanding Heights for the U.S. Economy

Towards the end of Lenin’s political career he slowly realized a planned economy, where wages and prices where controlled, would never deliver the Utopian society Marx and Engles had envisioned. During his final years of reflection, Lenin was in favor of returning property rights back to small business owners and farmers. There was much criticism from his supporters, the Bolsheviks. Lenin defended the new direction of the Communist party by stating that the government would still have control over the ‘commanding heights’ of the economy; which were large manufacturing industries, banks, and foreign trade.

Throughout the twentieth century, people of Europe and the United States have witnessed the pendulum of economic ideology swing back and forth adding to much instability and volatility. Pundits and Politicians have setup camp at opposing sides with the occasional defector. Thanks to the age of instant, and often, disinformation, most people can fill in the blanks for events leading up to the current financial crisis. And chances are; you will be able to predict their political ideology depending on the reasons they list. Too much government involvement via the Community Reinvestment Act, too little regulation of complex securities, interest rates artificially suppressed for too long. The list goes on and most people are too busy shredding 401k statements to research and independently decipher the increasingly growing number of talking heads in the media and in Washington.

The U.S.’s Commanding Heights. The auto, health care, and financial industries have begun massive overhaul by the Federal government. An inefficient, bloated government has received ownership stakes in over 500 private companies. Even capitalism has been the scapegoat for just about every problem conceived by proponents of the nanny state. Capitalism has allowed millions of people around the world to achieve a sense of prosperity through economic freedom that no other system could duplicate. With communism, Marx and Engels’ cures for European society’s ills sounded impressive when it was printed in the 1850’s; but after four decades of implementation, Lenin knew it meant back to the drawing board. In fact it was Mises and Hayek, two Austrian Economists, that uncovered the problems central planning posed for distributing resources effectively throughout the economy.

Price Mechanism to the Rescue. It wasn’t a new form of social justice created by politicians. It was an invisible force, much like gravity and it only operated in the free markets created by capitalism.

In fact, would capitalism get as much criticism if it wasn’t considered an ism? In early 2009, G20 protesters marched to overthrow capitalism as if it were this mechanism that was created simply to exploit cheap labor and scorch the earth. As long as there are free societies, it cannot be suppressed simply because capitalism represents the complete opposite of tyranny. The freedom to put your capital where you like, intended to be free from government involvement. Capitalism is an ‘anti-system’ that can only operate in tandem with a functioning democracy.

Back to Reality. The pendulum of big government solutions has already begun to swing the other way, and it didn’t just start with President Obama. The Federal government has increased in size and its spending exponentially since the last economic crisis of this scale. The question for many people, especially in their twenties and thirties; “what will our system of government and our economy look like in the not too distant future”?

Efficient capital markets function properly when trust is universal amongst all parties; including the biggest player in town – Uncle Sam. When investors think the Federal government changes the rules half way through the game, it becomes even more difficult for the economic recovery to gather steam. For example, the bond holders of Chrysler have taken a back seat during a company restructuring and the Fed has mandated new leveraging limits for banks. The future is uncertain if investors will still assume price determination, information aggregation, and risk sharing are standard house rules when the Obama Administration is done ‘tweaking’ the economy to their personal preferences.

More Hope Needed. A younger generation of Americans have also entrusted the baby boomers to bequeath a system of government that worked as well as when it was entrusted to them. Or should they assume the generational tyranny of debt will become as American as apple pie and hope the new commanding heights will still allow the cultivation of prosperity, free from government intervention? - N.C. Wilcox

Has the integrity of the U.S. Equities Market been compromised?

Since the fall of 2008, there have been an increasing number of rumors about the integrity of the U.S. equities market. I’m sure most of this criticism is simply magnified because people are paying more attention and want answers after watching their 401ks drop 40% in such a short timeframe. Even the most novice investor will tell you that the Securities and Exchange Commission dropped the ball when it came to regulating crooks like Madoff. The complex derivatives market became so confusing and the use of these securities were so frequently used by “to big to fail” institutions, it was nearly impossible for any Federal regulators to pro-actively monitor them. I can’t even discuss the economy with my Aunt without her dropping a few F-bombs when Goldman Sachs name is mentioned. People can almost sense it; something stinks in the state of New York. And maybe even in the nation’s capital.

Plunge Protection Team

Adding to the list of crazy conspiracy theories that are almost too sensational to make up and too real to ignore is the Plunge Protection Team. After the crash of ’87 the Working Group on Financial Markets was created by Executive Order 12631 and signed on March 18th, 1988 by President Reagan.

PPT was made up of the President, the Fed Chairman, the Treasury Secretary, the SEC Chairman, and the CFTC Chairman. The premise was to stabilize the markets by buying key securities within major indexes. If enough securities were purchased, the market plunge would cease. And if all this took place while a few short sellers got squeezed, nobody would know the difference.

Its theory is rather simple, but its impact is profound. Assuming the PPT executes only on low volume trading days, and it has been done so since 1988; how much “irrational exuberance” over the last twenty years has been an illusion? They’ve already called this the lost decade for trading if you were a traditional buy and hold investor and you can’t help but ask where the DJIA would be after the lows were tested in March (Dow 6,500).

Milton Friedman on the U.S. Health Care System

"nobody spends somebody else's money as wisely as he spends his own" - Milton Friedman

Friedman also wrote: "Third-party payment has required the bureaucratization of medical care. ... A medical transaction is not simply between a caregiver and a patient; it has to be approved as 'covered' by a bureaucrat. ... The patient has little ... incentive to be concerned about the cost since it's somebody else's money. The caregiver has become, in effect, an employee of the insurance company or, in the case of Medicare and Medicaid, of the government. ... An inescapable result is that the interest of the patient is often in direct conflict with the interest of the caregivers ultimate employer."

8 years ago, Economist Milton Friedman wrote a series of essays; one in particular called How to Cure Health care by Milton Friedman. Many of the same inefficiencies can be found in the system today.

An Independent Observation About Global Warming

Bible Toting, Gun Carrying Right-Wingers. For the past eight years I have heard that the Republican and Conservative movements have been tarnished because many party members have mixed religion with politics. Even I have referred to these individuals as the bible toting, gun carrying Republicans that have ruined the Conservative message. Often they do not speak of limited government and personal liberty, but bring God’s indignation to numerous discussions. I have heard many Liberals argue that anyone that relies on faith and carries it to public office, does not belong in politics. Although, I do not agree with such a harsh statement as that; I do believe pockets of the country, which invests much of their time on religion, has gained an extremely influential voice within the Republican party.

Tree Hugging, Marxist Hippies. On the other side of the spectrum, we now have an extremely Liberal agenda in this country which is attempting to push for a ‘green revolution’; a plan that will cost future tax payers enormous amounts of money and expeditiously usher in a higher cost of living. It has become nearly impossible to question the validity of any research regarding global warming publicly, or in private conversation, without being accused of hating your own planet. Like many, I believe humans from many nations around the world have robber Earth of vital precious resources and polluted the planet and it is time to make personal sacrifices and change our way of life.

It can be agreed upon that every United States citizen wants to bequeath a clean planet to the next generation. However, isn’t it safe to say this Liberal agenda also asks us to make decisions based upon faith rather that scientific evidence? They ask us to have faith in a message which includes a scientifically flawed model. - N.C. Wilcox

EPA Does Not Acknowledge Scientic Proof about Climate Change

The Competitive Enterprise Institute has obtained an EPA study of the "endangerment" to human well-being ostensibly caused by carbon dioxide emissions, together with a set of EPA emails indicating that the study, which concludes that carbon dioxide is not a significant cause of climate change, was suppressed by the EPA for political reasons.

EPA silences a Climate Skeptic

UNDER CONSTRUCTION

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them” – Thomas Jefferson