Uncle Sol Starting a thought farm

Troubled FDIC

My first article on Return of the Great Depression has gone live.

The FDIC announced last Tuesday that the number of troubled banks has risen from 552 in the third quarter of 2009 to 702 for the fourth quarter and that the fund may have to cover up to $20 billion in additional losses by 2013. If the economy worsens, this number could rise. The New York Times reports that Sheila Blair, FDIC chairwoman, said Tuesday that it was unlikely the FDIC would need to tap its emergency credit line with the Treasury Department, but she would not rule the possibility out.

The FDIC is losing money hand over fist. The only way they could possibly become solvent again is if the economy makes a remarkable recovery, soon. However, property prices are not rising and the only reason that foreclosures aren't still dumping on the market is that banks aren't kicking people out of their homes when they don't pay their mortgages. When you add the coming Commercial Real Estate mortgage crises to all this, it doesn't look good.

Banks are failing one after another and the FDIC covers the deposits. They have asked financial institutions for advance fees to stay afloat, but are running low again. And that well can only be dipped once. Once the fees are paid, they are paid. Now the only thing left for it to do is go to the Treasury, and the FDIC doesn't operate with a guarantee that the Treasury will back it. Personally, I don't see the Treasury turning them away, given the uproar that such an action would cause.

One has to wonder, in the end, how much this will cost. I'm curious to find out, if when all of this is over they figure out that Federally insuring the deposits of bank customers allows banks to take on more risky positions, resulting in a greater possibility of going bust. Or will they just keep scratching their heads.

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