Sunday, September 7, 2008

Guarantees Are Worthless When the System Is Bankrupt

Source: EIR Executive Intelligence Review

Guarantees Are Worthless,
When the System Is Bankrupt

EIR Online for this week's issue...

by John Hoefle

[PDF version of this article]

While the Federal Deposit Insurance Corporation (FDIC) has gone to great lengths to assure the public that their bank deposits are safe—at least up to the insured limit—it is obvious that the agency lacks the capital required to back up its claims. As long as the FDIC closes only small banks, it can meet its responsibilities, but it does not have the resources to even begin to deal with the magnitude of the crisis it faces.

The same is true of the Federal Reserve, which is running out of room on its balance sheet to continue the escalating bailout process it began last December, and also true of Fannie Mae and Freddie Mac, whose role as a dump for the toxic waste of the banking system means that they will not survive on their own. All of these players, the FDIC, the Fed, Fannie and Freddie, and others like the Federal Home Loan Banks, can always turn to the Federal Government for cash, but the Federal Government itself is operating at a deficit, already borrowing money to meet its spending requirements. Thus, while there is no shortage of guarantees, none of the players actually has the money it needs to satisfy those guarantees, in anything approaching a worst-case scenario.

The Federal Government, it is assumed, can always borrow more money, but under our current unconstitutional central banking monetary system, it borrows that money by issuing bonds, which are sold through the Fed into the financial markets. That is, it is borrowing money from the very financial markets it is attempting to bail out. One does not have to be a professional economist to spot the flaw in such a scheme (in fact, it appears, the only people who fail to see the glaring flaw in the scheme are professional economists, bankers, and their pet regulators, who have a vested interest in ignoring the obvious).

In the end, whatever the Federal Government does manage to borrow, becomes the obligation of the taxpayers, most of whom are themselves dependent upon borrowed money for their survival, and living in an economy which has been operating below breakeven for some four decades, and falling further behind by the day. Ultimately, the guarantees are worthless, because there is nothing backing them.

Shrinking Banking System

For those who would prefer to believe that the banking system is sound, the FDIC's just-released second-quarter report is not encouraging. For one thing, the net income reported (read: claimed) by FDIC-insured commercial banks and savings institutions was just $5 billion, the second-lowest figure since 1991, and a whopping 87% below the second quarter of 2007. This is not surprising, given the huge losses the banks have been reporting of late, and while we believe that the reported income figures are seriously overstated, the plunge from the consistent $30 billion plus quarters of recent years shows a trend which cannot be ignored. The FDIC also reported a small drop in the total assets of the 8,451 institutions it insured, to $13.30 trillion from $13.37 trillion in the first quarter. Such drops are uncommon—it is the seventh quarterly drop since 1987—but it is also the largest, and a sign of things to come. The asset drop was also accompanied by a small drop in equity capital...

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More: EIR Executive Intelligence Review

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