It would seem that the logical response to this announcement is go run the banks right now, before March 26, and before anyone on Fox and Friends thinks to mention to their viewers what this really means.
Dropping reserve rates to zero massively increases FDIC's and NCUA's risk exposure, and simultaneously increases the size of craters that individual banks can make.
FDIC and NCUA are not bottomless pits of money, and I expect that, with a key safeguard removed, banks and credit unions now have the power to discover their bottoms more quickly than anyone should care to contemplate.
I should disclaim: I am not a banker, I am just a completely random person on the Internet, possibly a troll, and certainly someone who occasionally posts with a trollish twinkle in their eye. Don't take this as financial advice. Anyone who assumes I know what I'm talking about will get what they deserve for their efforts.
"FDIC insurance is backed by the full faith and credit of the United States government." [1]
Given that FDIC insurance is backed by the United States government, if the FDIC system is unable to cover its losses, wouldn't that represent the United States defaulting on its obligations?
I'm not saying that's impossible, but it seems like FDIC could represent a...pretty large bit of money.
I mean the FEd is currently considering what will amount to a near $1T aid Package as well, so I don't know how much the fed has on hand bit it really can't be much much more than 2T or so. So maybe.
The FDIC can get as much currency as they need from the Treasury to cover their obligations, so in that very technical sense they aren't likely to default. However, in the event this were ever actually tested they might as well have defaulted since the resulting inflation would be so high that currency would be worthless. Going from "can't get your money out of the bank" to "your money can't buy anything" isn't exactly an improvement.
(I realize this is pretty old, but I just came back to look at this, sorry)
> However, in the event this were ever actually tested they might as well have defaulted since the resulting inflation would be so high that currency would be worthless. Going from "can't get your money out of the bank" to "your money can't buy anything" isn't exactly an improvement.
While I could see this being true, I don't see how pulling cash from my bank and storing it under a mattress helps this scenario at all. Inflation hurts every dollar equally, regardless of whether it's stored in my bank, under my mattress, or is sent to me from the FDIC.
This is what I'm pondering at the moment. First would be the issue that this announcement is going to cause panic withdrawals (if it hasn't already) which I would guess has its own negative side-effects. Then it makes me wonder if printed paper would be worthless in a worst-case scenario anyway.
Or is this going to turn into Greece where all banks will close or limit the amount that can be withdrawn.
What a shit-show this has become
EDIT: another thing to consider is where to store all this cash if you withdraw. For those that have 6 figs in cash sitting in their banks, exposing that large sum of money in physical form poses an enormous risk (e.g. natural disasters or accidents being a big one)
True. It might dilute right quick if the banks get to start printing it, too. I suspect the Nash equilibrium may be for them to do so with reckless abandon.
One would hope that the Fed wouldn't actually allow that to happen. But how does one re-impose reserve requirements without causing even more problems?
It's like in that one song: "And I don't know why she swallowed the fly. Perhaps she'll die."
On the upside, I suppose we'll now get to have an empirical test to settle that age old debate over whether the number of people allowed to print money should be one or many. Pity Bitcoin's in such a shambles, so we can't with clean conscience make it a test among zero, one and many.
Banks don't print money. They give out depositors' money to borrowers. If those depositors all demand their money back, then the FDIC covers it, so the borrowers owe the governemnt (taxpayers) money. If they pay back, crisis averted. If they don't, then it's a wealth transfer from taxpayers to the people who borrowed the money and spent it on consmption or waste.
Is there a reason I shouldn't rely on the FDIC (or NCUA for credit unions) insurance?
Is the expectation that if banks systematically fail, FDIC won't be able to cover all of the losses?