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Old 06-07-2010, 08:24 AM   #21
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I'd be pretty shaken up too. It's one thing to hear varying opinions from the so called "experts" but to have a trusted brother tell you this is pretty scary. I would talk to him more and find out how he arrived at his conclusions. You didn't provide many details so I can't comment on his analysis.

I agree with the other comments that the chances of losing money in a FDIC insured bank is highly unlikely. If the FDIC does get in a jam, it will be after some large failures deplete the insurance fund. So even in a worst case scenario, this wouldn't happen overnight.

If you are worried about this possibility, you may want to take a look at the financial strength of the banks you deal with. Bank rate.com provides ratings here:

Bankrate.com Safe & Sound (tm): Bankrate free rating system for banks, thrifts, credit unions
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Old 06-07-2010, 09:12 AM   #22
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Originally Posted by Purron View Post
I'd be pretty shaken up too. It's one thing to hear varying opinions from the so called "experts" but to have a trusted brother tell you this is pretty scary. I would talk to him more and find out how he arrived at his conclusions. You didn't provide many details so I can't comment on his analysis.

I agree with the other comments that the chances of losing money in a FDIC insured bank is highly unlikely. If the FDIC does get in a jam, it will be after some large failures deplete the insurance fund. So even in a worst case scenario, this wouldn't happen overnight.

If you are worried about this possibility, you may want to take a look at the financial strength of the banks you deal with. Bank rate.com provides ratings here:

Bankrate.com Safe & Sound (tm): Bankrate free rating system for banks, thrifts, credit unions
Thanks for the input, Purron. The bank where we hold our laddered CD's has never made a bad loan re: real estate. I think I will stay put for now.

He thinks that the next election cycle will reflect the mood of people not wanting to bail out any more entities, especially banks. He also talked about how the stimulus money is running down, and we don't have as many options to deal with the sort of crises we saw in 2008. We didn't talk for a long time, but I am going to have to get him to visit so I can pick his brain.
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Old 06-07-2010, 09:14 AM   #23
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This is not really true. Look above. It may well be rue that no one will lose money in an insured institution, but they are not the same.
OK... how about....

For all practical purposes... they are the same....


Sure... there is that 1 in a huge amount that it is not the same.... but as someone else pointed out.... if the 1 happens... you probably will not be any safer with treasuries than with FDIC funds... or cash, or anything else issued by USA...

So.. back to my original post... it is the same (for the results that will happen if FDIC does not pay money out)
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Old 06-07-2010, 09:19 AM   #24
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My brother seemed to think that Treasuries are a bit safer.


But that is just wrong thinking.... IF the FDIC does not make a payment on a failed bank... the treasuries that you own will more than likely be worthless... or maybe a couple of cents on the dollar... the practical result is you will be in the same boat either way...

PS... IF the FDIC does not pay... you more than likely would get a good amount of your deposits back... depositer are at the top... so think that you would get 50% to 90% of you money... it might take awhile to get it, but you will get it... but the financial ramifications of them not paying is so much worse...
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Old 06-07-2010, 09:24 AM   #25
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Thanks for the input, Purron. The bank where we hold our laddered CD's has never made a bad loan re: real estate. I think I will stay put for now.

He thinks that the next election cycle will reflect the mood of people not wanting to bail out any more entities, especially banks. He also talked about how the stimulus money is running down, and we don't have as many options to deal with the sort of crises we saw in 2008. We didn't talk for a long time, but I am going to have to get him to visit so I can pick his brain.
That is probably not true... I was never a leander, but worked for banks for many years... any bank that 'does not make a bad loan' is not making any loans...

All the other things might be true... but does not come into the discussion on the FDIC... I have not heard anybody complaining about them making DEPOSITERS whole... this is not a 'bank bailout'... the bank is closed.. the deposits and loans are sold off... it might look like there is a bailout... but there is not.
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Old 06-07-2010, 09:31 AM   #26
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But that is just wrong thinking.... IF the FDIC does not make a payment on a failed bank... the treasuries that you own will more than likely be worthless... or maybe a couple of cents on the dollar... the practical result is you will be in the same boat either way...
Agreed. These are two sides of the same coin. If the feds allowed the FDIC to not honor its obligations, the market would have no reason to trust the "full faith and credit" of Treasuries, would it?

I can only begin to imagine how much worse the recent meltdown would have been - and how many more banks would have failed spectacularly - if savers didn't have faith in FDIC insurance. That many people were "hoarding cash" in savings accounts even as the banks were struggling is testimony to that.
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Old 06-07-2010, 09:49 AM   #27
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He said to put my money in treasuries, and re-assess in a couple of years. But, I really don't think the government would allow the FDIC to default due to security reasons. He also said that now is a good time to sell my gold, because it will tank along with stocks.
While it is true that theoretically congress has the power to let the FDIC default, congress also has the power to theoretically force treasuries into default (in 1996 congress refused to increase the debt limit of the United States prompting the treasury secretary to warn that he might have to let treasuries default: TREASURY CHIEF WARNS CONGRESS ABOUT DEFAULT - NYTimes.com). In other words, if you want to indulge in doomsday scenarios, you have to be aware that both FDIC-insured deposits and treasuries carry the same (tiny) political risk.
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Old 06-07-2010, 10:48 AM   #28
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From the fact that this thread is still being "debated" it is obvious that many of you (including me it would seem) have WAY TOO MUCH TIME on our hands.

Yea... early retirement, once again demonstrating that we can waste our time anyway we choose!

Still it does not change the fact that in the real world this is a complete non-issue.

As to default, the US will NEVER default. Full Stop. It is an impossibility as our debts are denominated in our own currency. All debts will get repaid; however, that is not to say it will be with worthless "paper" (hyper-inflation). But even this, while not a zero probability like the FDIC issue, is still extremely low. Markets will force the US spending hand (through increasing interest rates), and so scared politicians will finally reel in expenditures long before that happens IMHO.
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Old 06-07-2010, 10:55 AM   #29
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Antmary,

My thoughts? If I were you, I'd just put money planned for Vanguard U.S. Treasury Money Market into the Vanguard Prime Money Market Fund and be done with it. The risk potential in both of them are so low and Prime has a better return.
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Old 06-07-2010, 10:59 AM   #30
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As to default, the US will NEVER default. Full Stop. It is an impossibility as our debts are denominated in our own currency. All debts will get repaid; however, that is not to say it will be with worthless "paper" (hyper-inflation). But even this, while not a zero probability like the FDIC issue, is still extremely low. Markets will force the US spending hand (through increasing interest rates), and so scared politicians will finally reel in expenditures long before that happens IMHO.
Let's just say that if things got so bad that the U.S. defaulted on Treasuries and/or its FDIC obligations, the loss of my deposits would probably be fairly low on the list of my concerns. But in the end, in the worst case the government could hyperinflate its way out of the debts and obligations.
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Old 06-07-2010, 11:06 AM   #31
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Let's just say that if things got so bad that the U.S. defaulted on Treasuries and/or its FDIC obligations, the loss of my deposits would probably be fairly low on the list of my concerns. But in the end, in the worst case the government could hyperinflate its way out of the debts and obligations.
Why would the US ever default when all it has to do is electronically create more money? It won't.

As to hyper-inflation, it isn't as easy to create as one might think. Clearly, the conditions are nowhere on the near term horizon (measured in years). Could it happen, I suppose, will it happen, I highly doubt it.

However, if it does I hope I'm dead 'cause it won't be pretty .
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Old 06-07-2010, 11:34 AM   #32
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You can open up an account with treasurydirect.gov and keep the money in the, I forget the word for it, but it is basically like a sweep account. I don't think you will get any interest but it is basically like putting it into a treasury money market account.

It is all online and treasurydirect.gov does not send statements. So, you may not trust it. I have bought I-Bonds in the past using the website. It is very easy to use.
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Old 06-07-2010, 12:50 PM   #33
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Thanks for the input, Purron. The bank where we hold our laddered CD's has never made a bad loan re: real estate. I think I will stay put for now.

He thinks that the next election cycle will reflect the mood of people not wanting to bail out any more entities, especially banks. He also talked about how the stimulus money is running down, and we don't have as many options to deal with the sort of crises we saw in 2008. We didn't talk for a long time, but I am going to have to get him to visit so I can pick his brain.
Almost certainly the next election will bring in deficit hawks. However, the banks will be fine. The Federal Reserve will take care of them if they need more help, but I doubt they will need any extra help. I bet many of them will start paying dividends again in a year or two.

The last jobs report makes me think this will be another jobless recovery. It will probably stay a jobless recovery until lots of baby boomers retire. I'm guessing that will take five years or so. I am positive there will be a skilled/educated labor shortage starting sometime within the next decade, particularly in STEM fields.

I don't see us going into a depression. A "lost decade", maybe.

I have been moving out of funds and putting my money into individual stocks. I will take my money from the dividends and not worry about capital gains. What I have been doing is paying attention to what makes money in third world countries. If a company can make a profit in a third world country then it will be able to make a profit here in the US.

I have 0% in bonds and a year's living expenses in cash. I don't see any reason why I shouldn't be buying more stocks. They look like bargains to me.

That's for my taxable account only. I basically have a conservative balanced fund AA on auto-pilot in my retirement accounts. I don't mess with my retirement accounts because I am probably wrong about everything.
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Old 11-28-2010, 07:51 AM   #34
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Time for a revisit of this thread.

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The reason I ask is this: my brother, who is a retired economist, called me a few days ago. He is very methodical, thorough, and low-key. He has never ever given me advice, or even inquired about how I am doing financially. He called every one of us siblings and told us that he thought that he needed to pass on the results of his research. He thinks that we are in for a depression in the near future, and that I should move my cash, stocks, and non-treasury bonds to U.S. Treasury funds; do not keep large amounts in a FDIC-insured bank. The vulnerability of the economy, according to him, may cause an extreme strain at the FDIC.
Since this post on June 6th, here are some returns:

15.4% US Total Stock Market
16.6% US Small Cap Value
21.8% Int'l Total Stock Market Large
26.5% Int'l Total Stock Market Small

which are all off the early November highs. Indeed, June 7th was the LOWest value for the Vanguard FTSE all-world ex-US fund VFWIX so far year-to-date. Ain't capitulation wonderful?
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Old 11-28-2010, 08:22 AM   #35
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Old 11-28-2010, 08:25 AM   #36
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This is not really true. Look above. It may well be true that no one will lose money in an insured institution, but they are not the same.
Agreed, they are not the same. But it works both ways. The government could just as easily restructure its treasury bonds while keeping the FDIC whole. It really depends on what the problem is. If the problem is massive, systemic losses from the banking sector that are so large the government can't support it, then FDIC may be allowed to fail while treasury bonds continue to pay. If, however, the problem is that investors are no longer willing to lend to the government at affordable rates, you can see a Treasury default and restructuring that leaves FDIC unimpaired.

But if politicians have an either or choice; default on treasuries that are at least 50% owned by foreign creditors, or default on FDIC insurance that will almost entirely impact domestic voters, which do you think is more likely?

One final thought, the "implicit" nature of the guarantee is not really relevant. You can't sue the government to make it honor its claims. It will pay, or it won't. In the case of FDIC insurance, a failure to pay likely results in a liquidity crisis and bankruptcy for every insured institution in the nation. That's a pretty high hurdle to cross before the government would entertain allowing FDIC to fail.
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Old 11-28-2010, 08:32 AM   #37
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Why would the US ever default when all it has to do is electronically create more money? It won't.

As to hyper-inflation, it isn't as easy to create as one might think. Clearly, the conditions are nowhere on the near term horizon (measured in years). Could it happen, I suppose, will it happen, I highly doubt it.

However, if it does I hope I'm dead 'cause it won't be pretty .
Agreed, that default is highly unlikely for the reasons you mention. Default would have to be a political choice, at this stage. Otherwise it would have to follow a series of events where the U.S. was forced to borrow in another currency for some time.

Unfortunately, given the state of our politics, an artificial debt crisis designed to force a radical reduction in Federal spending doesn't seem all that far fetched (in that case you'd rather own insured deposits than Treasuries, BTW).
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Old 11-28-2010, 10:05 AM   #38
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Agreed, they are not the same. But it works both ways. The government could just as easily restructure its treasury bonds while keeping the FDIC whole. It really depends on what the problem is. If the problem is massive, systemic losses from the banking sector that are so large the government can't support it, then FDIC may be allowed to fail while treasury bonds continue to pay. If, however, the problem is that investors are no longer willing to lend to the government at affordable rates, you can see a Treasury default and restructuring that leaves FDIC unimpaired.

But if politicians have an either or choice; default on treasuries that are at least 50% owned by foreign creditors, or default on FDIC insurance that will almost entirely impact domestic voters, which do you think is more likely?

One final thought, the "implicit" nature of the guarantee is not really relevant. You can't sue the government to make it honor its claims. It will pay, or it won't. In the case of FDIC insurance, a failure to pay likely results in a liquidity crisis and bankruptcy for every insured institution in the nation. That's a pretty high hurdle to cross before the government would entertain allowing FDIC to fail.
Possibly true, or possibly false, but answering an assertion that I never made. My only point was very straightforward- FDIC insured accounts and US Treasury securities are not identical. And they are clearly not.

In response to your main point, I think it is unclear that if given the stark choice, the US would prefer to stiff small domestic owners of FDIC insured accounts, about whom the case could be made that it was not exactly unknown that the FDIC was woefully underfunded; or default on money full faith and credit owed to our bankers the Japanese, the Chinese, and the oil exporting nations.

Ha
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Old 11-28-2010, 10:22 AM   #39
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I'd be pretty shaken up too. It's one thing to hear varying opinions from the so called "experts" but to have a trusted brother tell you this is pretty scary. I would talk to him more and find out how he arrived at his conclusions. You didn't provide many details so I can't comment on his analysis.

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Old 11-28-2010, 11:16 AM   #40
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But, my brother doesn't write books or publish newsletters; he has no financial reason to "peddle fear." He spends his time analyzing the markets, etc. I do respect his 40+ years of research. What is odd to me is, simply, is the fact hat he did take the time and effort to call every one of us siblings seemingly out of the blue. Hopefully, he is simply misinformed.
Sometimes intelligent people can get caught up in an issue and lose perspective.
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