Here comes the next bank bailout

This morning I found a cute little article about a very non-cute topic. It turns out the FDIC’s bank insurance fund dropped 20% in the 2nd quarter, to a rather alarming balance of $10.4 billion. What the article failed to mention is that since the 2nd quarter ended in June, banks have been dropping like flies – 19 in July and 12 in the first three weeks of August. Sometimes four or five per week.

I haven’t done the math about what all of these failures have cost the fund (and for some reason the FDIC doesn’t make that information easy to find). But two recent failures have done significant damage on their own: Colonial Bank cost $2.8 billion, and Guaranty Bank cost $3 billion. Unless I’m missing something, 10.4 minus 2.8  minus 3 equals a measly $4.6 billon left. Those two failures alone drained more than half of the fund. The other 29 failures were each much smaller, but presumably added up to some actual money.

The fund’s balance first showed up in the news almost exactly a year ago, when it was reported that the failure of IndyMac had sunk the fund to an alarmingly-low $45.2 billion, which was only 1.01% of what it is supposed to cover, and below the legally-required level of 1.15%. Ahh, those were the good old days. N0w, we are below 1/10 of the legal requirement, and also within one large failure of the fund going totally dry.

Why is nobody talking about this? Are they worried about runs on the banks? Are they trying to get health reform passed before launching into the next round of bank bailouts?

Actually, it may be that they’ve set it up so that the problem can be taken care of under the public radar. I found a great little resource with visual graphs of the bank failures and fund levels. It helpfully reports that the fund is being replenished through such bold moves as a 0.05% fee, and “Congress has raised the FDIC’s line of credit from $30 billion to $100 billion — with the option of going to $500 billion through 2010.” What a relief! The problem is solved, and we can simply loan money to the banks while they repackage toxic assets and sell them back to us in the exact same way they got us into this mess. What could go wrong?

My reason for writing this is not to cause alarm about your specific bank account. Indeed, it looks like the government is willing to extend nearly unlimited credit to its uncreditworthy friends in the banking industry, even when they can’t make enough money selling disguised toxic assets.  The general trends are not good: the list of “troubled” banks jumped from 305 to 416, and nearly 30% lost money last quarter.

Most banks are still in pretty decent shape, but as a whole the “free market” model of banking is dead, dead, dead. The only way this parasitic zombie system is still alive is through sucking taxpayers’ blood. Unfortunately the bugger has tapped an artery, so we can’t just yank it off or we’ll be in worse shape than before. (And yes, I know zombies prefer brains)

However, we should all stop doing new business with banks until their deposits dwindle and their insurance funds rise to a point that is not so severely out of whack. Some banks will fail, but that is simply because they were running ponzi schemes and need to fail. Don’t worry, Congress will foot the bill and you’ll get your deposits back.

Instead, we should put new deposits in credit unions. which are generally in good shape. The National Credit Union Association just reported that credit unions saw increases in memberships, assets and savings levels. I’ve even heard of one credit union struggling to loan out all the money that it has (sorry, can’t name it, but call around and maybe you’ll find it).

I’ve said it before, and I’ll say it again: It is not a coincidence that credit unions are doing well.

Credit unions may not be the groovy co-ops of yore, and they do not always maintain the strongest democratic practices. But while banks were coming up with progessively more creative and dangerous ways to profit, credit unions generally stuck to the basics of meeting their members’ needs in ways that they must report to those members. It made a huge difference, and as a result, no federal money has been needed to bail out any credit unions. Some credit unions are a little wobbly (you can ask for their figures and find out!), but generally they are doing well, and collectively they are taking care of their own problems.

Some banks were also prudent, but collectively the private banking system has all but failed. Whether you want government out of finance, or want better security, or just don’t want to entrust your money to a banking industry that has shown itself to be untrustworthy, credit unions are the best place for you money.

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