Are Banks trustworthy when the economy defaults into deflation and depression?
Peter Oberois
Feb. 11, 2007

Banks are as good as their credit exposures. The FDIC insures deposits to some extent, but again the insurance scheme holds less than 1.5% reserves outing your money into deep risk.

Banks are trustworthy when in normal circumstances. If there were to be a run on the bank and they weren’t able to pay back your principal, the goodwill of their business would be tarnished forever. But the problem comes when a bank confesses wrongdoing and has to go belly up without help from Government. Can FDIC go bankrupt? It is unlikely but possible. With a growing budget deficit and war expenses, the government may not be able to support the ailing banks and rescue the depositors like they did in late eighties.

During deflation driven depression, Banks will have severe trouble in collecting money from their clients, like home owners, credit card holders, and so on. The cash flow in banks will go negative. People are now afraid to put any new money in the bank. Businesses are scared that the ailing banks will collapse. The bubble in 1929 was one hundredth of what it is today. The banking almost collapsed between 1929 and 1934. The effects on the financial system were devastating.

Fortunately, the government and the people in general were not up to the neck that time. They could initiate public spending programs and spur the economy back. This time the key is in the hands of the Asian central banks. The Japanese and Chinese central banks will care little if the economy goes down the tube.

Simply put, the time has come to watch over your shoulder when you deal with any bank. Be careful, use many banks. You should keep substantial amounts of your money in Government Tbills, or simply hidden somewhere inside your home.

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