Bail-out is out, bail-in is in: Time for some publicly-owned banks

Published on Intrepid Report, by Ellen Brown, J.D., May 3, 2013.

… The crossing of the Rubicon into the confiscation of depositor funds was not a one-off emergency measure limited to Cyprus. Similar “bail-in” policies are now appearing in multiple countries. (See my earlier articles here.) What triggered the new rules may have been a series of game-changing events including the refusal of Iceland to bail out its banks and their depositors; Bank of America’s commingling of its ominously risky derivatives arm with its depository arm over the objections of the FDIC; and the fact that most EU banks are now insolvent.   

A crisis in a major nation such as Spain or Italy could lead to a chain of defaults beyond anyone’s control, and beyond the ability of federal deposit insurance schemes to reimburse depositors. The new rules for keeping the too-big-to-fail banks alive: use creditor funds, including uninsured deposits, to recapitalize failing banks.

But isn’t that theft?

Perhaps, but it’s legal theft. By law, when you put your money into a deposit account, your money becomes the property of the bank. You become an unsecured creditor with a claim against the bank. Before the Federal Deposit Insurance Corporation (FDIC) was instituted in 1934, U.S. depositors routinely lost their money when banks went bankrupt. Your deposits are protected only up to the $250,000 insurance limit, and only to the extent that the FDIC has the money to cover deposit claims or can come up with it.

The question then is, how secure is the FDIC?

Can the FDIC go bankrupt? … //

… Also at risk: Pension funds and public revenues:

William Buiter, writing in the UK Financial Times

in March 2009, defended the bail-in approach as better than the alternative. But he acknowledged that the “unsecured creditors” who would take the hit were chiefly “pensioners drawing their pensions from pension funds heavily invested in unsecured bank debt and owners of insurance policies with insurance companies holding unsecured bank debt,” and that these unsecured creditors “would suffer a large decline in financial wealth and disposable income that would cause them to cut back sharply on consumption.”

The deposits of U.S. pension funds are well over the insured limit of $250,000. They will get raided just as the pension funds did in Cyprus, and so will the insurance companies. Who else?

Most state and local governments also keep far more on deposit than $250,000, and they keep these revenues largely in TBTF banks. Community banks are not large enough to service the complicated banking needs of governments, and they are unwilling or unable to come up with the collateral that is required to secure public funds over the $250,000 FDIC limit.

The question is, how secure are the public funds in the TBTF banks? Like the depositors who think FDIC insurance protects them, public officials assume their funds are protected by the collateral posted by their depository banks. But the collateral is liable to be long gone in a major derivatives bust, since derivatives claimants have super-priority in bankruptcy over every other claim, secured or unsecured, including those of state and local governments.

The Cyprus wakeup call: … //

… But that was in 2011, before the Cyprus alarm bells went off. It is time to pry open the black box, get educated, and get organized. Here are three things that need to be done for starters:

Protect depositor funds from derivative raids by repealing the super-priority status of derivatives.
Separate depository banking from investment banking by repealing the Commodity Futures Modernization Act of 2000 and reinstating the Glass-Steagall Act.
Protect both public and private revenues by establishing a network of publicly-owned banks, on the model of the Bank of North Dakota.

(full text inclusive many hyper links).

  • (For more information on the public bank option, see here. Learn more at the Public Banking Institute conference June 2–4 in San Rafael, California, featuring Matt Taibbi, Birgitta Jonsdottir, Gar Alperovitz and others.
  • Ellen Brown is an attorney and president of the Public Banking Institute. In “Web of Debt,” her latest of 11 books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are webofdebt.com and ellenbrown.com).


Links
:

Centralized Planning in the United States, on naked capitalism, by Nathan Tankus, a student and research assistant at the University of Ottawa, MAY 2, 2013: Discussions of centralized planning in the West often take it for granted that the Soviet Union and similar social systems are the only ones with centralized planning. This is a basic (albeit ideological) confusion that results from the belief that markets and centralized planning are incompatible. This is not the case …;

Combatting the Crisis: ECB Cuts Interest Rates to Record Low, on Spiegel Online International, May 02, 2013: the European Central Bank cut interest rates on Thursday to a record low of 0.5 percent in an effort to combat the deepening recession across the euro zone …;

Prospects for 2013: German Economy Faces Year of Uncertainty, on Spiegel Online International, by David Böcking and Maria Marquart, January 02, 2013: Will 2013 be an “unlucky 13″ for the German economy? Will the country face a recession, or will it succeed in defying the crisis? There is much to suggest that there won’t be any major economic setback. The mood on the markets is currently one of cautious optimism …;

Federal Deposit Insurance Corporation FDIC: on it’s website; on en.wikipedia.

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