Okay, so 16 minutes after my last post, Ben Bernanke says he will consider more rate cuts. Nice, and toss in the commentary that sound like the Fed is taking signals from the TIPS market on inflation, as well as the commentary in the minutes that some members were leaning toward cuts in the Fed funds rate.
The key here is how much of the loosening they allow to work its way into the banking system, versus how much they put into the intervention programs. So far, it hasn’t been much.
I’d like to warn in advance I’m nowhere near sophisticated in my view of the market, and whatever the hell the fed is doing, but I sense a bank run could happen. People like Cramer aren’t a help, telling people to sell all stocks.
Questions – do people removing money from investment accounts put new stress on big banks? I know for example my optionsxpress account is held somehow in JPM.
Would the FDIC backing these investment and personal accounts in a crisis stress the actual Fed balance sheet?
I’m most fearful of widespread money-printing and inflation in the event of a bank run, despite the low TIPS you mentioned. So, if a bank run for any percentage of the $3 trillion in US personal savings would pose a threat to the value of the dollar, I thought of a solution and I was wondering if it would work.
If the FDIC is stressed in a bank run, they should charge a 2.5% fee with the agreement that that money was placed in a newly formed personal account of the Federal Reserve. If the person chose to take the money elsewhere, then there would be a 5% fee (or whatever is necessary to deter it and quell inflation) and they were free to go. And if things did smooth out, the taxed money could be returned later. It is my uninformed opinion that this would curb inflation.
This is a supreme step in creating a huge national bank, but so many steps have already taken place in this direction with the Fed now dealing in commercial paper and having big credit facilities and short term paper. Personal accounts would just seal the deal. I do realize that the unwinding of such a venture would be a nightmare, as you suggested in your “All that Jazz” article, but having real personal savings may quell the combustability (at least that due to lack of confidence) of the mega-SIV.
Sorry for being loosely off-topic, and thanks for sharing your views in these confusing times!
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The FDIC is as sound as our government. They will stand behind the FDIC until the government itself is broke.