Reason #66: The FDIC and the Myth of Insured Money

What do the housing market crash and the credit meltdown mean to the average American? Well, think about your checking and savings accounts, your CDs, your IRAs. Those funds all sit in bank accounts. Now consider who has been underwriting the trillions of dollars in bad loans and bond issues. Those same banks.

When you go to the bank, you see those stickers posted everywhere announcing that accounts are federally insured, that the “full faith and credit” of the United States government will make sure nothing bad happens to your hard-earned cash if your bank goes belly-up. But if you recall, the United States government is already almost $10 trillion dollars in the hole. Where exactly are all these funds supposed to come from if numerous banks start failing? What is the treasury department going to do, sell even more T-Bills to the Chinese?

It’s called a run on the banks, and it’s happened before - in my lifetime no less.

Make no mistake. Many banks are extremely vulnerable right now. Several smaller ones have already failed, but it’s not just the little ones that are vulnerable. The big boys are in danger as well. They’ve taken on billions in bad loans. And, remember, loans stay full value on the banker’s books until borrowers default. It’s only then that the true nightmare of the situation emerges, so just because the worst hasn’t happened yet doesn’t mean it’s not right there waiting to go down.

If enough banks fail, the government’s empty promise to reimburse all account holders would be shown to be a lie and pretty soon people would be rushing to their banks to pull out their money before it’s too late. That’s called a run on the banks, and it’s happened before - in my lifetime no less. And all the conditions are ripe for it to happen again.

NEXT: Reason #67: This Didn’t Have to Happen!