Saturday, November 22, 2008


After providing record bailout funds for our nation's financial institutions they still can't find it in themselves to lend to each other. Apparently they still don't trust one another.

Enter the taxpayer ... again.

Yesterday the Federal Deposit Insurance Corporation - the institution created during the Great Depression to provide confidence by saving the deposits of the little guy (you and me) - ruled that they will now guarantee loans made between financial institutions. That's right. Banks that don't want to take market risks and lend to each other, because they don't trust their institutional colleagues, now have access to bailout funds AND will get the American taxpayer to insure the loans they make to other institutions.

This is akin to borrowing money from a rich relative and then having them pony up more money when your "investement" goes bad (which is pretty much the story of George W. Bush's investment life).

Estimated Cost to the American Taxpayer: $500 billion to $1.4 trillion. Nice.

Now, to be sure, the money isn't being pumped out immediately. The banks who borrow money have to collapse first. But don't worry. If the Savings & Loan debacle from the 1980s is any indicator of what lurks around the corner this should be no problem. This graph (from shows what we can expect when an FDIC government guarantee like this is made (click on the graph if you can't read it).

What's important for me to note here is that 1980 was the year that Congress raised the FDIC insurance limit from $40,000 to $100,000 for our nation's financial institutions. Then, in 1982, Congress said S&Ls could essentially invest and make loans wherever the S&Ls wanted. This was like saying, "Go out and have a few drinks with your friends, we just raised your bar tab limit ... which we'll go ahead and pay if you can't." These dynamics help explain the surge in bank failures in the late 1980s.

Today, most of the the drinking's been done, and we're getting ready to tally the tab. But "W" is still at the bar, buying his friends more coctails and paying for their cab rides home. More bank failures are around the corner. Can you guess who's picking up the tab?

- Mark

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