Robert Prechter The FDIC Anaesthesia Is Wearing Off

The following article is an excerpt from Robert Prechter's Elliott Wave Theorist. For more information from Robert Prechter on bank safety, download his free report, Discover the Top 100 Safest U.S. Banks.

Perhaps the single greatest reason for the unbridled expansion of credit over the past 50 years is the existence of the Federal Deposit Insurance Corporation, another government-sponsored enterprise created by Congress. The coming rush of bank failures is an outcome made inevitable the very day that Congress created the FDIC. The reason is that the creation of the FDIC allowed savers to believe that their deposits at banks are “insured” against loss.

But the FDIC is not really an insurance company. No enterprise, absent fraud, could possibly insure all the banking deposits in a nation. Nor does the FDIC do so, despite its claims. The FDIC is like AIG, the company that sold too many credit-default swaps. It contracted for more insurance than it could pay upon. Because depositors believe the sticker on the door of the bank, they have abdicated their responsibility to make sure that their banks’ officers handle their deposits prudently. This abdication allowed banks to lend with impunity for decades until they became saturated with unpayable debts.

Today, most banks are insolvent, and the FDIC is broke. This condition is deflationary for three reasons: (1) Banks are coming to realize that the FDIC cannot bail them out in a systemic crisis, so they have become highly conservative in their lending policies, as described above. (2) The main way that the FDIC gets its money is to dun marginally healthy banks for more “premiums” (meaning transfer payments) to bail out their disastrously run competitors. The more money the FDIC sucks out of marginally healthy banks, the less money those banks have on hand to lend, which is deflationary. (3) The banks that have to cough up all this money will become more impoverished at the margin, so banks that otherwise might have survived a credit crunch will be thrown even closer to the brink of failure. This is another deflationary risk.

A friend of mine whose family owns a bank told me that the FDIC recently raised its 6-month assessment from $17,000 to $600,000. In the FDIC’s latest announcement, it is considering requiring banks to pre-pay three years’ worth of “premiums,” i.e. triple the normal annual fee in a single year. It will be a miracle if the money lasts through 2010. When these funds are gone, the FDIC will have two more options: to issue its own bonds and pressure banks to buy them; and to tap its “credit line” of up to half a trillion dollars with the U.S. Treasury. It’s the same old solution: take on more new debt to back up failing old debt. More debt will not cure the debt crisis.

Meanwhile, the FDIC is contributing to the deflationary trend. It has “tightened rules on required capital levels,” which forces banks’ loan ratios to fall; and it has “extended its extra monitoring of new banks from the first three years of operation to seven years” (AJC, 11/19), meaning that banks will now have to wait four additional years before they can go crazy with loans.

For more information from Robert Prechter on bank safety, download his free report, Discover the Top 100 Safest U.S. Banks. You'll learn how to find a safe bank, the critical difference between lending and banking, tips on international banking, and more.

Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

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Comments

JL Wallace

24 Nov 09, 12:38 Rothschild - PORTAL Alliance - Nasdaq

I was wondering if you have heard anything about the Nasdaq's "PORTAL Alliance"? This consortium of Rothschild-influenced banks was created in November of 2007, but there has been a complete media blackout regarding any of its activities since it was created. When you look at the list of financial institutions and banks that are "members", everything that has happened in the financial markets since November 07 (a fascist coup) starts to make one uneasy... From Forbes.com: (1744-1812) Meyer Amschel Rothschild: Meyer Amschel Rothschild helped invent modern banking by introducing concepts such as diversification, rapid communication, confidentiality and high volume. The superlatively discreet foreign-exchange banker diversified from the very beginning, selling antiques and procuring loans. Remarkably, Rothschild was willing to cut into his own profits in order to secure future business. And, earlier than most, he understood that time and information meant money, and he pulled out all the stops to remain in constant contact with associates across Europe. That network came in handy when he helped finance England's war effort during the Napoleonic Wars. Rothschild institutionalized his bank with a far-sighted will that ensured the continuation of his business. Considered a founding father of international finance, his banking empire--thanks to his five sons--had expanded to London, Paris, Vienna and Naples at the time of his death. Corporate Heirs: Merrill Lynch (nyse: MER ), Lehman Bros. (nyse: LEH ), Bear Stearns (nyse: BSC ), Goldman Sachs (nyse: GS )... http://www.forbes.com/business/2005/07/21/rothschild-banking-international-cx_0721bizmanrothschild.html ------- PORTAL Alliance: The founding members of The PORTAL Alliance are: Bank of America, Bear Stearns, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, NASDAQ, UBS and Wachovia Securities. (see: "PORTAL Alliance" - 144a) http://ir.nasdaq.com/releasedetail.cfm?ReleaseID=275224 http://www.reuters.com/article/companyNewsAndPR/idUSN1245320920071112?sp=true http://www.portalalliancemarket.com/

