The Federal Deposit Insurance Corporation (FDIC) states there are currently 117 "troubled banks" on its watch list. The FDIC is supposedly prepared to insure the deposits (up to the FDIC limit) for those banks, should they fail. But, Washington Mutual and Wachovia -- two of the largest bank failures in history -- weren't even on the FDIC's list before they collapsed.
That begs the question, how accurately is the FDIC tracking potential bank failures. And, more importantly to each of us: how safe is your money if the FDIC is terribly wrong?
A report on CNBC today enumerated the bank failure estimates of some notable banking research firms, most of which have been in business for many decades and are well regarded as experts within the banking industry. Those firms found:
- RBC Capital: 300 likely bank failures over the next 3 years. Nearly three times more than the FDIC currently expects.
- Bauer Financial: 426 potential bank failures, or banks needing assistance to avoid failure.
- Weiss Research: 1,479 banks plus 159 thrifts, with total assets exceeding $3.2T.
The Weiss report, which is by far the most troubling, estimates over 1,500 potential failures. That is 1-in-9 of every bank in the US. It also represents 41 times the assets the FDIC currently has available to insure deposits, which again is based on their, much smaller, 117-banks number.
So the big question is: can the FDIC come up with $3,200,000,000,000 to cover insured bank deposits should the worst case scenario play out?
The FDIC is "backed by the full faith and credit of the United States of America". I actually take some comfort in that. Not as much as I used to, but I highly doubt the US will go out of business anytime soon. However, anything is possible given current events. Another, related question arises if one was to worry that the FDIC might not make good dollar-for-dollar on full coverage of insured deposits: what about US Treasuries? Hopefully everyone agrees that if US Treasuries were to "break the buck", we're all (as in everyone, worldwide) in for one terrifying ride.
More likely, the FDIC will cover everything. But at what cost? How many trillions can we print? Already, the printing press is losing its leverage, and deflation is taking hold regardless of helicopter-Ben's generosity. Even if the FDIC returns all those trillions to the depositors, that doesn't mean depositors will spend them. Rather, if such a terrible failure of the banks were to occur, I posit that you and I would take our FDIC-insured dollars with the ink still wet and stick them under our mattresses. I know I'm keeping much more cash in reserve than ever before in my life right now.
That is _exactly_ what happened in the Depression. Liquidity couldn't be printed, bought, or borrowed. The only escape is fundamental growth.