Off-topic: Economy

[DTS]

I was having coffee with a friend late yesterday after both our families had spent 2 days at IndyMac and WaMu. We got into a general discussion about what was going on with the economy and housing, the financial health of the FDIC, etc.

All of a sudden, he tells me that he thinks he should pay off his mortgage, which is still sizable and pull all of his CDs, again a sizable amount, out of the bank and put it under the "mattress". I told him that I thought that was not a good idea and asked why he thought he should do all this.

He is very concerned the USD will become totally worthless and the mortgage company would foreclose on his home because of this. As far as the money is concerned, if the $ does become worthless, it being in a "mattress" will not help him. Does he pay his mortgage with gold???

My understanding of the FDIC is that they have reserves of $17B. They have used $1.5B of this for IndyMac (surely, more banks to follow). This leaves enough to bale out 10 more banks, give or take. What happens at this point? Does the gov't come in and they do what??

I know this sounds like Chicken Little, but I'm now curious, as well, as I have zero faith in our gov't, banks and the way most people handle their finances, zero!

I'd be interested in your take on this.

D

[Davc]

If the system collapses the only things with short term value will be storable food, weapons, and ammunition.

[BHoffman]

Imho:

The time has come to pay the Piper. Whether this current righting of the market will evolve into another Great Depression will depend on the actions of the Fed.

from http://useconomy.about.com/od/critic..._depress_2.htm

"Monetary policy caused the Great Depression of 1929. According to Federal Reserve Chairman Ben Bernanke, the Great Depression was actually caused by the contractionary monetary policies of the Fed. During the U.S. recession in the summer of 1929, the Fed decreased the money supply by 30%. It raised the Fed Funds rate to defend the value of the dollar. Without liquidity, banks collapsed, forcing people to remove all funds and stuff them under the mattress, causing economic collapse. Only the advent of World War II got the economy going again."

If Bernanke caves in to political pressure and uses the Fed to skew the natural balancing act of the markets, then I believe the US is in trouble.

I believe your friend should realize deposited funds are FDIC insured to $100k and should make sure that no one bank is holding any more than that. Spread the risk around.

Speaking of risk, high yield is usually high risk. IMHO the banks should allowed to fail. People should lose their homes to foreclosure if they cannot afford the payments. High prices of oil will eventually lead to less demand, more supply, and finally to lower prices once an unacceptable level has been reached. Phil Gramm was right. We are a nation of whiners and the US is not in any recession. That we are no longer allowed to fail is a direct blow to the freedoms we enjoy.

IMHO: The US has become a socialism since the EPA destroyed our ability to compete globally by manufacturing goods. Blue collar workers used to be able to make enough money to support a family and afford a modest home and retire with a pension. Those days are gone and that lifestyle was sacrificed when our leaders decided to move manufacturing pollution to 3rd world countries rather than innovate cleaner ways of producing goods. We did manage to achieve some measure of world peace by offering opportunities to these struggling nations, however. Perhaps that was the price for cheaper goods. But make no mistake, there is no free lunch.

I believe economic busts follow economic booms follow economic busts. The natural motion of a free market is a wave, not a straight line. The result of the USD losing ground in foreign markets encourages foreigners to import US goods. This has already happened, as the "trade deficit" has declined. I don't particularly believe in the "trade deficit" because the US "trades" its dollars for goods in equal measure. Dollars act like any other commodity in the marketplace. Right now, dollars are cheap. This is going to encourage people to "buy" them. That's going to increase demand and drive the price of the USD back up.

To sum up the diatribe: Some people made bad decisions. That costs. Who will pay? The grasshopper or the ants? If the ants are forced to pay, then history may repeat itself. Hopefully, Bernanke will have the guts.

Also, I believe this "economic crisis" is being amplified by the media. CNN, FOX, MSNBC - they are all "entertainment news" channels IMHO. They seek to frighten us. I liked Michael Creighton's book "State of Fear".

Thanks for listening. The views expressed here do not reflect any opinion of the Management. I am very sorry if this has crossed the line and is too controversial. My feelings will not be hurt if you guys feel it should be deleted.

[Nashville]

Self-Regulating

Our financial economy is, to a degree, self-regulating. When the dollar becomes cheap enough, our goods will be a bargain to the rest of the world and exports will rise, and the dollar will rebound.

If the Federal Reserve has to create money with no backing to cover bank losses (including the FDIC) then the dollar will continue to fall. If the FDIC runs out of money, the politicians, out of political necessity, will print money and cover.

The Gods of the Market Place had a brilliant idea to help the economy: putting people with poor credit, making $7/hr. into a $200,000 house. So reasoned the Gods of the Market Place - keeps housing market booming, increases home ownership, keeps good construction jobs going, avoids the accordian-like fluctuations in the housing market, etc.

Is it any wonder this happens when it's time to pay the piper?

"They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more..

As surely as Water will wet us, as surely as Fire will bum,
The Gods of the Copybook Headings with terror and slaughter return!" - R Kipling

[OtisMozzetti]

[QUOTE=
My understanding of the FDIC is that they have reserves of $17B. They have used $1.5B of this for IndyMac (surely, more banks to follow). This leaves enough to bale out 10 more banks, give or take.

...

I'd be interested in your take on this.

D[/QUOTE]

The figures given do not match the figures I saw in some news stories. The size of the FDIC insurance fund was around 3 times that large, and the cost of rescuing the IndyMac depositors was also around 3 times that large. No big deal, though, a billion here a billion there, etc. ...

What really does trouble me about the IndyMac situation is that uninsured deposits are eligible to receive an "advance dividend of 50% [of the uninsured deposits]". It seems to me that before the FDIC pays out any insurance money for the insured deposits, all of IndyMac's assets (including whatever money is to pay that advance dividend of 50%) should have to be used up to pay the insured deposits.

So if the FDIC has to pay out insurance from the depositor insurance fund, there should be nothing at all left for the uninsured depositors. ??????

[S T]

Good Question Dennis

I have had several clients over the years, pose the question

Do I take my money out of my CD investments and pay off my mortgage, so I own the house free and clear?

Interest rates are not what they were. As a matter of fact, I found that the CPI from June 2007 to June 2008 was 5%, that is huge, and it appears to be growing. 2 months ago when I checked it (for lease renewals) it was only 3.9%.

If you can obtain close to 4-5% on your CD investments, and the mortgage is 6% with tax deductions factored in, aren't you about even? Of course if you earn less or have a higer interest rate on your mortgage, you probably are not even. It would be costing you money. I guess it goes back to the question you have to pay someone, so is it pay taxes, or do you pay the mortgage company.

Frankly our whole society is living on borrowed money and debt. That can not be good! There is little to no incentive for US taxpayers to save money and be debt free.

Now the problem comes into play about FDIC coverage after last week's episode with Indymac, so one really needs to make sure that there is not too much any one bank. Are we insured for $100K, for sure on a single owner of an account. Are joint owners such as a husband and wife insured for $200K? I think so, but then that questions has arisen as well, and who are we to believe the bank teller that opens the account.

Maybe life would be simplier if not so much money to keep track of, own your home free and clear of debt, and not having to worrying if you have too much money in the bank in case the bank failed.

I don't know!

Sandy

[erchess]

Reflections

1. I believe that the 100K limit on insured savings is per account not per bank. In the system as we have it people with uninsured deposits should stand in line with other creditors and be paid pennies on the dollar when the assets of the failed bank are divided.

2. I don't think I would keep over 100K in any bank unless I had so much money that dividing all the money I wanted to put in banks by the number of banks I had any faith in forced me to do so. In this day brokerage houses make it possible to put money in CDs at banks all over the country.

3. The first debt for the guy in OP to get rid of is credit card debt. After that if he has an Adjustable Rate Mortgage then he should ask himself how secure his major source of income is in the short term. My first thought either way would be to get a fixed rate mortgage if I could. If I could do that, then to me keeping a year's expenses in investments such as short term CDs and Money Market Accounts would be my first priority. However the idea of an ARM scares me more than the idea of having no such ready cash on hand if I think my income stream is adequate and is unlikely to be taken from me in the next year. For example if I am a tax preparer with a growing business then I think my income stream is likely to keep up with inflation or deflation as well as anyone's. If on the other hand I am an employee and my last several performance reviews have been less than stellar or the company is on poor financial footing then my income stream is not at all secure.

4. There was mention made of things getting so bad that the only things of value would be storable food, weapons, and ammo. There is absolutely no excuse in the Fed letting things get that bad but if they do my goose is cooked. I do not choose to live in a home that will stand up to a concerted attack by a dozen people for even a short time and I do not choose to buy and learn to use the weapons and ammo that would be necessary to keep the mob from attacking at its leisure.

[DTS]

Ammo

All very thoughtful answers!

When gas around here hit $3.95, the movie "Mad Max" came to mind. Now at over $4.80 per, I have a total understanding of the movie.

What is that saying that life imitates art or visa versa?

[DTS]

What really does trouble me about the IndyMac situation is that uninsured deposits are eligible to receive an "advance dividend of 50% [of the uninsured deposits]". It seems to me that before the FDIC pays out any insurance money for the insured deposits, all of IndyMac's assets (including whatever money is to pay that advance dividend of 50%) should have to be used up to pay the insured deposits.

So if the FDIC has to pay out insurance from the depositor insurance fund, there should be nothing at all left for the uninsured depositors. ??????

Otis,

My wife and I have had 6 banks go under where we had money over the years, mainly the middle to late 80's. One account we had a bit over the $100K due to interest. It took us years to recover most of that.

As they sold off assets, they would send us a check for $60, $100, etc. I believe the last check from that payoff was about $2. We never did recover all the lost interest, but that was OK. Just happy to get the principal back in full.

D

[David1980]

I laugh at stories like that, selling everything to store cash in a mattress. If the USD falls surely the value of that stash also fell.

If his fear is in a falling/fall-out of USD, have him invest in foreign markets. I'm sure there's some good easily accessible index funds for that sort of thing.

If he thinks all paper money on the planet is going to go down the drain then buy gold.

Depending just how paranoid he is there are much better options than sticking it in a mattress.

[JohnH]

There's one alternative which hasn't been mentioned yet in this string, which would be putting the money into something SAFER than an FDIC insured account which does not have a $100K maximum coverage limit. This would be lending money directly to the US Government via Treasury Bills.

Take a hypothetical case of a retired widow in her 70's with $600K in cash plus $80K in an IRA. She has a drug-addict son and a worthless daughter, both of whom waste every penny they can get their hands on legally or illegally, so joint ownership of any accounts is out of the question. She doesn't use the internet, only has 3 banks in town to deal with, and she is a very conservative saver. She needs some income from the $600K to supplement her SocSec & IRA income. So she puts $100K in each of the banks, plus the $80K IRA in one of the banks since it enjoys separate FDIC protection.

What does she do with the remaining $300K if she wants to maintain the maxium protection? The simplest thing to do would be to put $100K into a 90-day treasury bill on roughly the same day in 3 consecutive months with instructions that it automatically renew each time it matures. This laddering means that she receives a monthly check from one of the 3 Treasury bills each month at whatever the going rate may be. She is also never more than 90 days away from getting her hands on the cash if she needs to access the principal in an emergency. (BTW-putting up bail money for the son or daughter is not considered a valid emergency)

One could play around with the maturity dates a little if they think it might produce a slightly higher yield, but the essential problem of safety of principal has been solved. TImes of high risk call for extreme measures, and in my opinion loaning the money directly to the US Government is the safest thing one can do. If it defaults on its obligations then it's a pretty sure bet the FDIC, SIPC, and every other financial protection would have already been in the tank. If Treaury bills aren't safe, then the only thing left really is ammo.

[erchess]

Bonds

John, why should your hypothetical widow not put at least one bank's worth of interest in bonds along with the money you want her to put there?

Also, there are some very attractive foreign government and domestic and foreign corporate bonds out there. I would advise her to invest in some of those as well. I disagree with your apparent assessment that US Treasuries are the safest bonds out there. I would consider them among the safer bonds but I like the governments of Northern Europe, Brazil, and Australia and certain corporations at least as well. I guess what I am saying is that even if things here tank to the point that the dollar is more or less worthless and the full faith and credit of the US Government is of no value there could still be places in the world where she could have a decent life.

[JohnH]

I respect your judgement, but I disagree completely when it comes to safe & secure investments. Until I decide to move to Northern Europe, Brazil, or Austrialia, I'm staying with the full faith & credit of the US government. If if tanks, all those other economies will already have become really bad memories.

And right now I can't think of a single US corporation that I would rate as less risky than the US government, for the simple reason that none of those corporations have the power & authority to crank up the printing presses if they get into deep trouble.

[BHoffman]

TBills and other options

TBills. After that, Mossbergs.

[JohnH]

Speaking of FDIC insurance, this string originally caught my interest because I was dealing with a client situation today involving how to structure accounts for maximum FDIC coverage. When we met with the bankers, the officers at two different banks informed us that a Payable on Death account was entitled to an additional $100K in FDIC coverage, no question. They didn't mention any limitations on the POD coverage even though they knew the beneficiaries were not the owner's spouse, child, grandchild, parent, or sibling

However, after researching it further, it appears to me that neither bank officer went far enough. As I understand it, only certain qualifying beneficiaries are entitled to POD coverage. So if the beneficiary is a cousin, in-law, neice, nephew, friend, etc then the $100K of FDIC coverage would not be applicable. Just goes to show you can't depend on the bank customer service officers to get it right either.

If someone has a different understanding of this I'd appreciate a correction.