The loss of the family home through foreclosure or bankruptcy can be a time of blessing for the family, a time when parents and children “close ranks” and become more keenly aware of their love for one another and the important things in life—faith, family and community—and less focused on material things that have no eternal value and can disappear in a moment. God can also use these circumstances to remind us of the truth spoken by Jesus in Matthew 6:19-20 and refocus our hearts on heavenly treasure.
Above all, renewing our faith and trust in God’s promises is of utmost importance during times of financial stress. Revisiting passages that speak of God’s faithfulness to His children will strengthen and encourage us when the future looks bleak. First Corinthians 10:13 reminds us that God is faithful and will not test us beyond our ability to bear it and will provide a way out of the trial. This “way out” may mean a new and better job that comes up right away. It may also mean a lengthy period of unemployment during which God’s faithfulness in providing our daily bread is shown to us. It may mean a new home, or it may mean living in reduced circumstances with relatives for a period of time. In each case, the way out is really the “way through” the trial, in which we learn of God’s faithful provision as He walks by our side through the entire ordeal. When the time of testing is over, our faith will be strengthened, and we will be able to strengthen others by bearing strong testimony to the faithfulness of our God. Source
Trust used to be a word associated with banks. But the avalanche of financial scandals, from manipulation of interest rates to mis-selling of financial products, has changed all that.At a time when so many economies and people’s livelihoods have been damaged, we need a strong and transparent financial sector that we can trust, one that is corruption-free. This requires an overhaul not only in the regulatory environment, but also a resetting of moral compasses by those in the industry. Both are possible.The relaxation of regulations in the past decade has encouraged banks to engage in ever riskier behavior, has hampered oversight of highly complex financial products, and has eroded standards of conduct. The lack of transparency and accountability in the financial sector has allowed people to cheat with impunity.Industry-friendly regulators failed to detect or prevent the mis-selling of financial products, a root cause of the subprime mortgage debacle. And even when regulators were warned about collusion in fixing a key benchmark rate known as LIBOR, they failed to do their job. LIBOR, short for London InterBank Offered Rate, reflects how much it costs banks to lend to each other and is the guide rate for fixing the amount of interest that will be charged on trillions of dollars’ worth of financial products such as mortgages.
Banks are the safest place to keep your cash. Nevertheless, bank failures happen from time to time. Here’s a look at what causes bank failures and what you can do about them. The main thing to know in a bank failure is that your money is probably safe. If your money is FDIC insured, you probably don’t need to panic.
What Causes Bank Failures
Banks go under when they are no longer able to meet their obligations. The bank might lose too much on investments, or the bank may be unable to provide cash when depositors demand it (see below).
Ultimately failures happen because banks don’t just keep your money in vaults. When you walk in and deposit cash (or deposit funds electronically), the bank invests that money. A simple form of investment is making loans to other bank customers so they can earn interest — and pay you interest on your deposits.
Banks also invest in much more complicated ways. If the bank takes large losses in any one area, it risks failing.
What Happens in a Bank Failure?
Most US banks are FDIC insured. If you are not banking at an FDIC insured institution, you’re taking a huge risk. When these banks fail, the FDIC takes over. They may sell the bank to another (stronger) bank, or they may operate the bank for some time as a federally owned bank.
The FDIC insures deposits up to $250,000, so keeping more than that at any bank may put your money at risk. However, it is possible to have more than $250,000 insured at one bank if several people or entities have an interest in the money. For example, retirement accounts and savings accounts for different family members can increase your protection. Take the time to understand FDIC limits if you have more than $2500,000 at the bank.
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For many customers, a bank failure is a non-event. Customers continue to use the checks, debit cards, and electronic transfer instructions that they used before the bank failure. At some point, customers may eventually get new checks and cards.
The FDIC does not publish a specific timeframe for resolving bank failures. They note that historically they have made funds available within one business day. They try to close banks down on Fridays and get back to “business as usual” by Monday morning.
However, circumstances with a given bank failure or with your accounts can slow the process down. The FDIC’s first choice is to create a new bank for seamless operations until your account is sold to another bank. In some cases, this option is not available and they cut you a check for your insured deposits.
Bank Runs and Bank Failures
After a bank failure is announced, there is little reason to make a run on the bank if your assets are insured. If the FDIC has already taken over, your money is no longer held by the weak and failing bank. If you want to get your money out and use a different bank, you can write a check or transfer your money electronically to the new bank.
If the FDIC has not found a successor bank, you will not have access to your money and you’ll have to wait for a check from the FDIC. In either case, there’s nothing you can do after a bank failure is announced to affect how much money — if any — you’ll lose.
If you have uninsured deposits at an FDIC insured institution, you may have a problem. The FDIC typically makes insured deposits available immediately after a bank failure. Uninsured deposits may not be available for years. The FDIC has to sell the institution and its assets and see how much money (if any) is left to distribute to creditors.
Sometimes bank branches are destroyed as a result of natural disaster or terrorism. Physical destruction is different from a bank failure. Again, if your accounts are insured the event is most likely just an inconvenience — not something that will completely ruin you.
Avoiding Bank Failures
It is difficult to know which banks will fail. The FDIC does not announce bank takeovers ahead of time. The best course of action is to make sure that you’re observing FDIC limits and not taking any risks.
Some bank rating services may help you avoid bank failures. These services look at banks’ strength, business models, and exposure to various risks. However, some bank failures come out of nowhere and cannot be predicted by outsiders. Source
- What Causes Bank Failures
- What Happens in a Bank Failure?
- Customer Experience
- Bank Runs and Bank Failures
- Uninsured Deposits
- Destroyed Banks
- Avoiding Bank Failures
Trust used to be a word associated with banks. But the avalanche of financial scandals, from manipulation of interest rates to mis-selling of financial products, has changed all that.At a time when so many economies and people’s livelihoods have been damaged, we need a strong and transparent financial sector that we can trust, one that is corruption-free. This requires an overhaul not only in the regulatory environment, but also a resetting of moral compasses by those in the industry. Both are possible.
The relaxation of regulations in the past decade has encouraged banks to engage in ever riskier behavior, has hampered oversight of highly complex financial products, and has eroded standards of conduct. The lack of transparency and accountability in the financial sector has allowed people to cheat with impunity.Industry-friendly regulators failed to detect or prevent the mis-selling of financial products, a root cause of the subprime mortgage debacle. And even when regulators were warned about collusion in fixing a key benchmark rate known as LIBOR, they failed to do their job. LIBOR, short for London InterBank Offered Rate, reflects how much it costs banks to lend to each other and is the guide rate for fixing the amount of interest that will be charged on trillions of dollars’ worth of financial products such as mortgages. Source
Why do I risk starting a run on Bank of America by withdrawing my money and presuming that many fellow depositors will read this and rush to withdraw too? Because they pay me zero interest. Thus, even an infinitesimal chance Bank of America will not repay me in full, whenever I ask, switches the cost-benefit conclusion from stay to flee.
Let me explain: Currently, I receive zero dollars in interest on my $1,000,000. The reason I had the money in Bank of America was to keep it safe. However, the potential cost to keeping my money in Bank of America is that the bank may be unwilling or unable to return my money.
They will not be able to return my money if:
Customers wait in line at the IndyMac Bank branch headquarters in Pasadena, Calif., in July 2008. Joshua Lott/Bloomberg News
- Many other depositors like you get in line before me. Banks today promise everyone that they can have their money back instantaneously, but the bank does not actually have enough money to pay everyone at once because they have lent most of it out to other people — 90 percent or more. Thus, banks are always at risk for runs where the depositors at the front of the line get their money back, but the depositors at the back of the line do not. Consider this image from a fully insured U.S. bank, IndyMac in California, just five years ago.
- Some of the investments of Bank of America go bust. Because Bank of America has loaned out the vast majority of depositors’ money, if even a small percentage of its loans go bust, the firm is at risk for bankruptcy. Leverage, combined with some bad investments, caused the failure of Lehman Brothers in 2008 and would have caused the failure of Bank of America, AIG, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and many more institutions in 2008 had the government not bailed them out.
In recent days, the chances for trouble at Bank of America have become more salient because of woes in the emerging markets, particularly Argentina, Turkey, Russia and China. The emerging market fears caused the Dow Jones Industrial Average to lose more than 500 points over the last week.
Returning to my money now entrusted to Bank of America, market turmoil reminded me that this particular trustee is simply not safe. Or not safe enough, given the fact that safety is the reason I put the money there at all. The market turmoil could threaten “BofA” with bankruptcy today as it did in 2008, and as banks have experienced again and again over time.
If the chance that Bank of America will not return my money is, say, a mere 1 percent, then the expected cost to me is 1 percent of my million, or $10,000. That far exceeds the interest I receive, which, I hardly need remind depositors out there, is a cool $0. Even a 0.1 percent chance of loss has an expected cost to me of $1,000. Bank of America pays me the zero interest rate because the Federal Reserve has set interest rates to zero. Thus my incentive to leave at the first whiff of instability.
Surely, you say, the federal government is going to keep its promises, at least on insured deposits. Yes, the Federal Government (via the FDIC) insures deposits in most institutions up to $250,000. But there is a problem with this insurance. The FDIC currently has far less money in its fund than it has insured deposits: as of Sept. 1, about $41 billion in reserve against $6 trillion in insured deposits. (There are over $9 trillion on deposit at U.S. banks, by the way, so more than $3 trillion in deposits is completely uninsured.)
It’s true, of course, that when the FDIC fund risks running dry, as it did in 2009, it can go back to other parts of the federal government for help. I expect those other parts will make the utmost efforts to oblige. But consider the possibility that they may be in crisis at the very same time, for the very same reasons, or that it might take some time to get approval. Remember that Congress voted against the TARP bailout in 2008 before it relented and finally voted for the bailout.
Thus, even insured depositors risk loss and/or delay in recovering their funds. In most time periods, these risks are balanced against the reward of getting interest. Not so long ago, Bank of America would have paid me $1,000 a week in interest on my million dollars. If I were getting $1,000 a week, I might bear the risks of delay and default. However, today I am receiving $0.
So my cash is leaving Bank of America.
But if Bank of America is not safe, you must be wondering, where can you and I put our money? No path is without risk, but here are a few options.
- Keep some cash at home, though admittedly this runs the risk of loss or setting yourself up as a target for criminals.
- Put some cash in a safety box. There is an urban myth that this is illegal; my understanding is that cash in a safety box is legal. However, I can imagine scenarios where capital controls are placed on safety deposit box withdrawals. And suppose the bank is shut down and you can’t get to the box?
- Pay your debts. You don’t need to be Suze Orman to know that you need liquidity, so do not use all your cash to pay debts. However, you can use some surplus, should you have any.
- Prepay your taxes and some other obligations. Subject to the same caveat about liquidity, pay ahead. Make sure you only pay safe entities. Your local government is not going away, even in a depression, so, for example, you can prepay property taxes. (I would check with a tax accountant on the implications, however.)
- Find a safer bank. Some local, smaller banks are much safer than the “too-big-to-fail banks.” After its mistake of letting Lehman fail, the government has learned that it must try to save giant institutions. However, the government may not be able to save all failing institutions immediately and simultaneously in a crisis. Thus, depositors in big banks face delays and defaults in the event of a true crisis. (It is important to find the right small bank; I believe all big banks are fragile, while some small banks are robust.)
Someone should start a bank (or maybe someone has) that charges (rather than pays) interest and does not make loans. Such a bank would be a good example of how Fed actions create unintended outcomes that defeat their goals. The Fed wants to stimulate lending, but an anti-lending bank could be quite successful. I would be a customer.
(Interestingly, there was a famous anti-lending bank and it was also a “BofA” — the Bank of Amsterdam, founded in 1609. The Dutch BofA charged customers for safe-keeping, did not make loans and did not allow depositors to get their money out immediately. Adam Smith discusses this BofA favorably in his “Wealth of Nations,” published in 1776. Unfortunately — and unbeknownst to Smith — the Bank of Amsterdam had starting secretly making risky loans to ventures in the East Indies and other areas, just like any other bank. When these risky ventures failed, so did the BofA.)
My point is that the Federal Reserve’s actions have myriad, unanticipated, negative consequences. Over the last week, we saw the impact on the emerging markets. The Fed had created $3 trillion of new money in the last five-plus years — three times more than in its entire prior history. A big chunk of that $3 trillion found its way, via private investors and institutions, into risky, emerging markets.
Now that the Fed is reducing (“tapering”) its new money creation (now down to $65 billion a month, or $780 billion a year, as of Wednesday’s announcement), investments are flowing out of risky areas. Some of these countries are facing absolute crises, with Argentina’s currency plummeting by more than 20 percent in under one month. That means investments in Argentina are worth 20 percent less in dollar terms than they were a month ago, even if they held their price in Pesos.
The Fed did not plan to impoverish investors by inducing them to buy overpriced Argentinian investments, of course, but that is one of the costly consequences of its actions. If you lost money in emerging markets over the last week, at one level, it is your responsibility. However, it is not crazy for you to blame the Fed for creating volatile prices that made investing more difficult.
Similarly, if you bought gold at the peak of almost $2,000 per ounce, you have lost one-third of your money; you share the blame for your golden losses with Alan Greenspan, Ben Bernanke and Janet Yellen. They removed the opportunities for safe investments and forced those with liquid assets to scramble for what safety they thought they could find. Furthermore, the uncertainty caused by the Fed has caused many assets to swing wildly in value, creating winners and losers.
The Fed played a role in the recent emerging markets turmoil. Next week, they will cause another crisis somewhere else. Eventually, the absurd effort to create wealth through monetary policy will unravel in the U.S. as it has every other time it has been tried from Weimar Germany to Robert Mugabe’s Zimbabwe.
Even after the Fed created the housing problems, we would have been better of with a small 2009 depression rather than the larger depression that lies ahead. See my Making Sen$e posts “The Stockholm Syndrome and Printing Money” and “Ben Bernanke as Easter Bunny: Why the Fed Can’t Prevent the Coming Crash” for the details of my argument.
Ever since Alan Greenspan intervened to save the stock market on Oct. 20, 1987, the Fed has sought to cushion every financial blow by adding liquidity. The trouble with trying to make the world safe for stupidity is that it creates fragility.
Bank of America and other big banks are fragile — and vulnerable to bank runs — because the Fed has set interest rates to zero. If a run gathers momentum, the government will take steps to stem it. But I am convinced they have limited ammunition and unlimited problems.
What is the solution? For you, save yourself and your family. For the system, revamp the Federal Reserve. The simplest first step would be to end the dual mandate of price stability and full employment. Price stability is enough. I favor rules over intervention. We don’t need a maestro conducting monetary policy; we need a system that promotes stability and allows people to make us richer. Source
The loss of employment and/or income is one of the most distressing events in life, especially for those supporting a family. Foreclosure on the family home or having to declare bankruptcy due to unemployment adds additional fear, uncertainty, and emotional turmoil. For the Christian man or woman facing unemployment, foreclosure or bankruptcy, there can be additional doubts about God’s goodness and His promises to provide for His children. How is the Christian to react to these catastrophic life events? What biblical principles can we apply to the loss of a home or a job and benefits (health/life insurance, retirement)?
First, it’s important to understand that God has ordained work for mankind. Work is described in the Bible as beneficial in that it provides for our needs (Proverbs 14:23; Ecclesiastes 2:24, 3:13, 5:18-19) and gives us the resources to share with others in need (Ephesians 4:28). Paul reminded the believers in Thessalonica that anyone who was not willing to work should not eat (2 Thessalonians 3:10) and that he himself worked at tent making so as not to be a burden on anyone (Acts 18:3; 2 Corinthians 11:9). So, loss of employment should not be an excuse for laziness, and all due diligence should be exercised to find other employment as quickly as possible (Proverbs 6:9-11).
At the same time, it may not be possible to find a position equal in pay and status to the one that was lost. In these cases, Christians should not allow pride to keep them from taking jobs in other fields, even if it means lowered status or less pay, at least temporarily. We should also be willing to accept help from other believers and our churches, perhaps in exchange for work that needs to be done in homes, yards, and church facilities. Extending and accepting a “helping hand” in these times is a blessing to those who give and to those who receive and exhibits the “law of Christ,” which is love for one another (Galatians 6:2; John 13:34).
Editor, Bankster Crime
MY MISSION IS NOT TO CONVINCE YOU, ONLY TO INFORM…
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