Congress never bailed out the banks

March 16, 2018

In 2008, banks including the Federal Reserve threatened us that the economy would collapse if we didn't give them $700bn. At least that was the story we were told. In fact, that's almost completely wrong.

The story claims that banks were insolvent and if the government didn't give money to these banks, people wouldn't have access to the money in their accounts. While this is mostly true, the blame was completely misdirected away from the real financial irresponsibility.

Fractional Reserve Lending

In order to understand where the real blame lies, you have to first understand the fractional reserve system. This system is where you have $1,000 and decide to put it into a bank. The bank then lends out that money except for a small "reserve" amount. The idea is that most people put a lot of money in their bank and never actually take it all out. They use other instruments to cause money in their account to transfer to someone else's account. In doing so, banks are able to lend out a large amount of that money, and nobody seems to know their money is missing.

Because of this, money starts appearing in more than one place at a time. Depositing your $1,000 becomes $1,000 in your account, and with a 20% reserve, becomes $800 in someone else's account. That account can then also be lent at 80%, and now a third account appears with $640. Then another, and another, an so on. This grows to become a considerable amount of money. This isn't just creating money out of thin air however, because in order to put $800 in a new account, someone else had to borrow that money and a debt account with -$800 is created. If you add all these accounts up, the total is still $1000. But what happens when the borrowers are unable to pay their loans like what happened in 2008? The accounts with positive balances are considered as good as cash, the money is not there conditionally based on the fact that the money was lent to another negative account.

The Federal Reserve used to track this information in their M0, M1, M2 and M3 reports. M0 was the amount of printed money, and M2 and M3 where more representative of the actual amount of money multiplied into people's accounts. They stopped producing the M2 and M3 reports in 2012, probably because those numbers would only cause more panic. That's not a good thing.

Many times throughout history, this system has failed. People panic and withdraw their money from the positive accounts, and those who were too slow to the bank were left with nothing.

Insurance

This is where insurance comes in. After the US had their own bank run during the great depression, the US government created the FDIC program to insure the banks. This was designed to make people more confident when putting their money into banks. In theory, there should never be a bank run agian, because no matter how many banks ran out of money, the FDIC would always ensue that nobody was left empty handed.

At the height of the real estate boom before the '08 crash, the FDIC was insuring over $12 trillion in deposits. At that time, there was only $1 trillion in printed US money in circulation, and usually more than half is overseas. The FDIC, like any other insurance company, keeps cash in an account in the event it has to pay a claim. The problem is, the FDIC was only holding $60 billion to cover those $12 trillion in accounts. That would be like asking a person who only has $10 to their name to insure your house for fire damage.

The Crash

As banks became insolvent, the FDIC had to step up and do it's job. Because all the accounts were insured, the normal procedure would be for the FDIC to come in and shut down the bank. All debts would be sold at auction, and all account holders would have their money moved into a new bank, funded by the insurance policy.

The problem was not that these banks were failing, as everything added up. They banks were following government rules and everyone's money was insured. There shouldn't have been any problems. Except that when banks started failing, the FDIC had to cover $700 billion worth of claims with it's little cash account of only $60bn.

Now if you follow congress at all, you'll know that they never make any mistakes - or at least that' what they'd like you to believe. Instead of taking responsibility for making promises they couldn't keep, they shifted the blame towards the banks. But although the fractional reserve system is not a sustainable system, if the FDIC had the cash to cover it's debts, there would not have been any real danger of economic collapse. The fractional reserve system is a terribly unstable system, but the FDIC only provides a false sense of security against that system.

While the FDIC does have more cash on hand now than it did in 2008, a lot more money has been printed, multiplied, and insured since. We are always just a small percentage of failing banks away from another tax-payer funded bailout of a bogus government program.

About the author:

Dan Behrman

Dan Behrman is an international speaker, promoting the ideas that Taxation Is Theft, indiviual freedom is pararmount to government, and we are not government property. He is founder of the Taxation Is Theft Shop, blogger on https://taxationistheft.info, and host of Taxation Is Theft podcast, YouTube channel, and Facebook page

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