For those of us who understand the underlying weaknesses and vulnerability of fractional reserve banking, and by extension the Federal Reserve and the FDIC, among other elements of the banking system, it wasn’t a surprise when the banking system collapsed. But for those unaware of this, it has shaken them to the core, as what was considered a safety net for almost all those using the banking system in the U.S., were suddenly given a painful lesson in the foundation which was built on shifting sand.
The great side to this is the entire industry and the government’s involvement and interference in it has come under scrutiny as never before, and that magnifying glass could end up bringing lasting change that could restore confidence in the banking system safely holding our money. None of that confidence will come from the types of initiatives being put forth from the G20 conference, but from systemic changes that will eliminate the threat altogether; things like getting rid of the Federal Reserve.
Most people still don’t understand why that’s needed, but they do understand what was considered a guarantee and safe in the past, is no longer safe now, and may not be in the future; I’m talking about what was considered the safest thing to do with your money: deposit it in a bank or invest it in a money market fund.
Most of us know that the Federal Deposit Insurance Corp (FDIC) will back up your bank account up to $250,000 (for now), and up until about a year ago everyone felt that was a sure thing. Now that the FDIC is close to running out of money, it’s starting to be understood that what was once considered a bottomless pit of money is in fact a limited resource, and if things get worse, the FDIC won’t be able to cover a complete collapse of the banking system in America, and so that leaves many people feeling nervous and unsure. That’s actually a good thing, as they should be, contrary to the endless assertions that no one will lose their money.
I know the FDIC has the billions in a line of credit with the Treasury, but that medicine could cause worse problems then we have now through the devaluation of the U.S. Dollar and an extraordinary surge in inflation, which we’re already going to suffer from the billions used to bailout the banking and other industries.
So I believe the FDIC will never have the aura of invincibility it enjoyed in the past, and as I said, that’s a good thing. People need to go over the finances of the bank they’re using themselves, to ensure it is on solid footing. At least check what analysts and observers are saying about certain banks in order to get a feel for their health. Today all we have to do is make a couple of clicks with our computer mouse and send our money to a safe place.
Money Market Funds
Other than a bank deposit, the other safest investment available to investors was the money market fund. While there have been a few that have failed throughout the years, they were still the next safest place to park your money.
The one thing that is a catastrophe for a money market fund is when the net asset value falls below $1, which what happened when Lehman wasn’t able to repay a $785 million loan from $62.5 billion Reserve Primary Fund, and they broke-the-buck.
Knowing they were subject to losses, investors made a run on the Reserve Primary Fund, and when the smoke cleared two days later, it had lost 60 percent of its holdings. That also caused runs on other money market funds across the country.
In answer to the question I presented in the title of this article, no, our money will never feel safe again in the way it did before the economic and banking collapse. Not only because of what has already happened, but because, in spite of assurance otherwise, is far from being over, and the continual reporting and coverage of the banking industry and the Government entities which are part of the problem will remain the minds of the public for a long time to come.
As I said before, this is a great thing to happen, as banking has always been a house of cards ready to collapse under a monetary system that is the problem itself, even though there were management problems at banks and bad decisions causing secondary issues.
Never before has this type of opportunity arisen that gives the public a chance to get a basic understanding of the banking and monetary system in America and to get a look under the hood to see what make it run. Now that many Americans are starting to understand how the engine works, they don’t like what they’re seeing, and want better answers than a few, minor adjustments before letting it take off again.
No matter what happens in the short term, this problem won’t be solved based on the weak responses from government and financial leaders around the globe. They are still in denial about the causes of the monetary problems, and so will continue on doing business as usual.
What’s different this time though, is they will never be able to operate in the secrecy they have in the past, and they will be much more accountable and out in the open. While that does nothing to deal with the systemic problems that need to be fixed, it will be a check and balance on incredibly stupid practices and behaviors until we get the message out to educate people and help them see what needs to be done.
Meanwhile, this generation will never feel like their money is safe like they did a couple of years ago, and that will keep the door open for learning and change going forward.