Monday, September 29, 2008 1 comments ++[ CLICK TO COMMENT ]++

Cutting Rates Won't Help

UPDATE: Added a chart from The Economist showing the deposit insurance in various countries.

Some are calling for the FedRes to cut rates but, on top of potentially causing inflation problems down the road, it won't have much impact. Look at the yield curve in the US (chart courtesy Bloomberg):



If banks can't make money off this, they never will. A rate cut will simply cause the likely bubble in US Treasuries to hit even more of an extreme, while credit costs in other areas of the economy (mortgages, credit cards, corporate bonds, etc) remain the same.

While this bailout works its way through the government--they only need 20 votes and it should be doable--other solutions need to be considered.

I don't generally agree with Jim Cramer but one of his latest arguments calling for the insured limits at banks to be increased from $100,000 to, say, $1 million is a small step that can help the banks. The threat right now is a run on these banks and a higher limit (assuming it is backed by greater financial resources at FDIC) will prevent this scenario. Some say regional banks are the next ones to face problems and these guys really need the deposit base. Bank runs are a real possibility for these regional banks since they are not as big and don't have the marquee brand name.

The following chart from The Economist shows the deposit insurance in various countries:



USA is near the lead but given that it is the wealthiest country on earth (ignoring little ones such a island states,) one would expect a higher limit. I'm not saying the deposit insurance really solves any problems; rather, it avoids the problem of a run on the bank.

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1 Response to Cutting Rates Won't Help

synchro
September 29, 2008 at 11:57 PM

Bank runs are a wonderful way to expose the fractional reserve banking fraud.

Extending deposit insurance to >$100K amounts would encourage further comatose and oblivious tendencies among those who inadvertently become enablers of banks' reckless behaviors.

Usually in an emerging panic, the person who panics first and bolts out of the door, comes out best.

You can opt out of the corrupt system 2 ways: one, open up a TreasuryDirect account w/ Hank and buy Short-term Treasury Bills and Notes directly from the US.

The other is to buy physical gold coins and store them yourself.

The former is a good way to store cash. The latter is a good way to give the world ponzi financial system the finger.

Either way will invite jeers, snickering, contempt, and extreme skepticism among those who opt in to the corrupt system. But how else are you going to know you are on the right track?

Cash and and small amount of gold are good ways to hedge against stupidity.

To hedge against social chaos and violence though, I recommend dry food, chocolate bars, spare razor blades and other consumer disposeables, antibiotics.

A good hand gun for night self-defense against single intruders is useful. A good shotgun or semi-automatic would be good against unruly crowds during the day. Grenades should be optional, as collateral damage could be extensive if not used right.

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