Our Unstable Economy: Bank Failures
November 4, 2010
While much of the mainstream media says that our economy is now in a state of recovery, large numbers of banks continue to fail nationwide. As of the writing of this article, 139 banks have failed so far in 2010, just one shy of the 2009 total of 140. In contrast, 25 failed in 2008 and only ten failed in the five years prior to that.
Why do banks fail? As described in The Creature from Jekyll Island, we no longer use a system of sound banking. Banks are given the authority to loan out money that does not exist. Because each bank lends out money many times in excess of its total amount of deposits, our banking system is inherently unstable.
Our banking system has been designed so that bankers do not have to be liable for a bank's losses. When a bank fails, it is typically dealt with in one of three ways, depending on its size:
SMALL BANKS are the ones most often allowed to completely fail, and in these cases the FDIC pays off each depositor up to $250,000 per account. However, banks do not pay enough premiums into the FDIC to cover all deposits. Under the Dodd-Frank Act of 2010, the FDIC fund covers between 1.35-1.5% of total deposits. For this reason, the FDIC can only cover the smallest bank failures. Because of the recent run of bank failures, at the end of 2009 all banks were required to pay three years of premiums in advance, a total of $46 billion, in order to keep the FDIC solvent.
MEDIUM BANKS are usually merged with a larger, more solvent bank. If you have ever been notified that the bank holding your loan has changed its name or been bought out by another bank, this is probably because your bank failed.
LARGE BANKS are what are often called, "Too big to fail." When a large bank is threatened the bankers turn to Congress and claim that if the bank is allowed to fail it will cause massive damage to the economy. In these cases the taxpayers ultimately end up rescuing the bank. This has been happening since 1971, when the FDIC bailed out Unity Bank and Trust Company. The bank ultimately failed, for a final cost of $4,463,000 to the taxpayers. Bailouts have happened so often since then that they could be considered a normal part of the system. The final insurer of deposits is "the full faith and credit of the United States," which means the US taxpayer.
This system can only continue as long as the public continues to believe the system works. With the FDIC currently pushed to its limit, a new financial shock wave could cause a new crisis of bank runs.