Public

Regarding the expansion of the FDIC powers to include guaranteeing the senior debt of banks and their holding companies…in reviewing the details, I think I figured it out.

Here’s the text:

The Secretary of the Treasury, in consultation with the President and upon the recommendation of the Boards of the FDIC and the Federal Reserve, has invoked the systemic risk exception of the FDIC Improvement Act of 1991. [Edit: love the name]

This action will provide the FDIC with flexibility to provide a 100 percent guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at FDIC insured institutions subject to the terms outlined below.

Scope of Eligible Entities

Eligible institutions would include: 1) FDIC-insured depository institutions, 2) U.S. bank holding companies, 3) U.S. financial holding companies, and 4) U.S. savings and loan holding companies that engage only in activities that are permissible for financial holding companies to conduct under section 4(k) of the Bank Holding Company Act ("Eligible Entities").

Not all companies are eligible, but "bank holding companies" are eligible.  

As several have commented on the posting below, there is now more detail on the bailout package details.

I’m not sure how much value there is in analyzing all these moves and wrinkles, in part because I think the whole situation is just too complicated to predict, and partly because I doubt we are being entrusted with the whole truth.

Still, there’s some interesting stuff here.

Once again, the "will of the people" was overridden by Congress in their haste to respond to an "emergency," and, once again, it turns out the people’s instincts were right.

Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?

Turns out we don’t need to buy any of those assets right away after all.

Who knew?

Well, the G7 met and decided that what we needed was, unsurprisingly, a flood of money.  An unlimited wall of new money to replace the money that mysteriously evaporated into the mist of the credit crisis.

I say "unsurprisingly," because this has all been tried before.

When John Law’s infamous credit experiment started to unravel in 1720, the French authorities first resorted to decreeing that their failing paper promises were worth more than gold  and silver, and then, upon the almost immediate failure of that edict, to printing as much as necessary to buy out the failing equity and debt issuances upon which the entire bubble was formed.

The whole thing collapsed in rather short order, and the angry, destitute crowds took matters into their own hands shortly thereafter.

Here’s how I summarize the news from this weekend:

Through all of this crisis, as regulators and politicians and bureaucrats have labored to inject needed funds back into failing financial institutions, few are asking the harder questions.

Such as:

• Does this crisis represent something deeper, like a general and unavoidable failure of our entire monetary system?
• Are the failing institutions worth saving?
• Will it work?
• Can the government afford it?

I understand the desire and urgency to "get something done," but I worry that a failed effort will be worse than no effort.  Why?  Because our monetary system is, to put it bluntly, somewhat of a Ponzi scheme, and therefore depends more thoroughly on trust than other systems.

After all, when a currency is backed only by a taxing authority, it is critical that the legitimacy and omnipotence of that authority not be called into question.

People are beginning to ask questions.

An interesting bit of news:

[quote]Oct. 10 (Bloomberg) — Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world’s financial markets while they “rewrite the rules of international finance.”

“The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,” Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis “can’t just be for one country, or even just for Europe, but global.” [/quote]

The really interesting part is here where he hints that a second aim is to revisit the Bretton Woods agreement.

Translation:  The US dollar’s role as the world’s reserve currency is up for debate.

In a few comments, readers have specifically asked, "What do you mean by a banking holiday?"

This is a fair question and I can answer it easily.  A banking holiday will consist of a period of time where your bank’s doors are closed and you will have limited access, if any, to your funds.

"What are the possible impacts of a banking holiday?"  Now this is a harder question to answer.  In reviewing the Argentinian experience, the most direct impact is that a large portion of trade will shut down, leading to a rapid depletion of consumer goods from store shelves.

Trade will still happen, but at the glacial pace imposed by a direct cash/barter economy.  In Argentina, there were stories of farmers buying cars from dealers using soybeans. Presumably the dealers then traded the soybeans off for something else they wanted.

If a banking holiday ensues, things will be very confusing for a while.

Below is
a snippet from the September 19 Martenson Report where I try to illustrate the progression of a banking holiday using a scenario format.

Dow futures are sitting at -418, or nearly -5% from their close yesterday.  SNP futures are in equally bad shape.

The world markets are having an even worse time of it.

I now raise the prospects of a banking holiday to being a world-wide event.  I will not be even the slightest bit surprised if Monday is the beginning of a market holiday. Followed quite possibly by a banking holiday.

Okay, folks, we are in the midst of a pretty serious stock market breakdown.

Yes, we’ve had bigger down days, but this is on the heels of some of the most concerted behind-the-scenes and out-in-the-open official intervention that we’ve ever seen.

This means the market has lost confidence, not just in the US authorities’ ability to manage the crisis, but more generally in central banking. 

World stock markets were in meltdown mode last night.  Japan was off more than 10% at one point.