“Backed by the full faith and credit of the United States Government.”

But what does that mean and what does this “FDIC” stand for?

What is the F.D.I.C.?

The F.D.I.C. is the Federal Deposit Insurance Corporation. The FDIC was started after the Great Depression in order to “promote public confidence in the United States Financial System.” You see, when the depression hit, dozens of banks went out of business and people’s entire life savings simply disappeared.

It is the FDIC’s job to guarantee the deposits of all American Citizens in any FDIC member bank up to a predetermined limit. Due to the recession every individual account is insured up to $250,000.00 until December 31, 2013, after which it will return to its previous $100,000.00 level.

Why aren’t all banks FDIC Members?

Why wouldn’t a bank want to be an FDIC member? Well, most do. Almost every bank that you come in contact with will be FDIC insured. The problem many find with it though is that the bank gives up much control over risk taking. The FDIC breaks each bank into a category of “riskiness” based on how much capital (cash) they maintain (instead of lending out):

• Well capitalized: 10% or higher
• Adequately capitalized: 8% or higher
• Undercapitalized: less than 8%
• Significantly undercapitalized: less than 6%
• Critically undercapitalized: less than 2%

If a bank ever falls into the final category, they will be issued a warning by the FDIC. If the warning goes unheeded the FDIC can take over management from the bank.

What happens when a bank goes under?

The FDIC has two methods for dealing with failed banks and making right with the insured customers.

1. The Purchase and Assumption Model
   This is a fancy way of saying that they sell the bank’s assets (including your deposits) to another bank, who then takes over responsibility.  This is the preferred method.  The sale and acquisition is practically unnoticeable for the average customer and the customer can continue banking with their new bank just as they did before.
2. The Payout Method
   This is a less fancy way of saying that the FDIC sells all of the bank’s holdings and uses the proceeds (plus Government Money if necessary) to pay back the bank’s depositors.

What types of Accounts do the FDIC insure?

To be sure which accounts of yours are insured, check the FDIC website.
In general though, the FDIC covers “Deposit Accounts” which include:

• Checking Accounts (What is a checking account?)
• Savings Accounts (What is a Savings Account?)
• Time Deposit Accounts (CD’s) (What is a CD?)
• Foreign Currency Accounts
• Outstanding Cashiers checks, etc.

His website has him quoted as saying:

“We can achieve universal access to quality, affordable health care without bankrupting our children with trillions more in debt or imposing draconian tax hikes on all Americans.”

I haven’t spent much time looking into his plan: the Patient’s Choice Act; so I am by no means claiming that he has a good plan here. I have no idea.

What caught me off guard was something else that he said during his interview.

“We are simply not in a position as a nation to be increasing our spending any more.”

This reminded me of what debt counselors tell people. Its a lesson everyone needs to learn at one point or another. Don’t purchase things until you’re in a position to purchase them.

For some reason, it all made sense to me.

Although we have many, many fiscally wise people in charge of our nation; Group think has reduced America to a teenage money mindset.

The nature of our government reduces the vast majority of politicians and leaders to being utterly powerless with these sort of issues.

If they’re not in power- who is?

Well; although we tried to put some of the more educated people in the hot seat to deal with fiscal issues– Americans want something and they want it now. When that happens- politicians either deliver or they leave office.

With this approach nearing 250 years in the making, America’s debt is well over $11 Trillion dollars.
In fact: Since September 2007 it has increased an average of $3.88 Billion per day!

As America decides that they don’t care about their current debt- they want healthcare and what’s another trillion on top of eleven trillion; she reminds me of a girl I met in a marketing class.

“I lost my job, but its no big deal. I just took out another student loan and I figure I’ll live off of that for a year. That way I don’t have to worry about money.”

Noooooooooooooo!!!!

That’s the road we’re walking down, Nation.

Do you want to live in a hormonal teenage country?

Or do you want to live in a country that has control over it’s own destiny?

The choice is being left up to each and every one of us. We need to make clear that debt is not acceptable.
Our country needs to get this deficit under control; or else we’ll each be paying for our nation’s childish decisions in the frighteningly near future.

If you want to Fix this problem:

Contact your Senator and Representative! Let them know what you think.
As I said before: their job is to appease you in congress. They are there to represent your ideas!

Don’t know your congressmen?
Use Visi.com’s tool “Contacting the Congress” to find your congressmen and their email addresses.

Have you ever wondered why the government is so terrible at fixing our economy? Well, its not all their fault. Today we’ll start a series about why they can’t quite make it work and the Lags associated with Fed Intervention.

Show me This Business Cycle thing

Below is what is known in MacroEconomics as “The Business Cycle”:
This is just a fancy way of saying “Showing that the economy goes up and down on a graph“.

The blue line is the business cycle as is, with its ups and downs- and the black dotted line is the long term trend of the business cycle.
As you will see, a free market economy (like the USA) always goes upward with time in the long term trend.

These ups and downs are awfully dramatic.

So what is the Gov’t Trying to Do?

The government’s goal is to achieve a line closer to the green one below, with less up and down swing. The less dramatic our economy as it continues its upward trend, the more content are the people. And as we all know- Government strives for the happiness of its people at all times….

Now – as the government tries to solves these issues with actions like tax increases and decreases, interest rate adjustments and spending, certain Time Lags come into play which disrupt their actions.

What do we mean by Time Lags?

If you’re a gamer, you’re familiar with the term Lag. There are three types of lag that affect the Fed’s response to economic woes or booms.

The Recognition Lag

The recognition lag takes place because when a Recession starts or ends, we simply can’t know it!
Huh?

It takes somwhere between 3 and 6 months for our Government Census bureaus to recognize that the economy has taken a turn for the better or worse.

So if the economy actually takes the turn downward at T1 (above), the government will continue high taxation, high interest rates and low spending as if the economy were in a boom until T2 months later.

This means that the government is actually fueling the recession for several months before it sees that it should be responding to a falling economy.

Well we Finally Realized it…

But notice… T2 is awfully close to the natural end of the recession.

Now that the Feds will start responding to a recession, it may well be nearing an end.
This means the Fed’s are unnaturally fueling a Boom now- which will have to come crashing back downward toward the trend, causing a more violent crash in the future.

But-
Even if we could somehow eliminate this Response Lag- the USA leaves us with two more.

So we’ve finally made it through the Response Lag.
The Feds have realized that we’re in a recession.

Putting a plan into action shouldn’t be hard! … Right?

Why Democracy Screws Up Economic Aid

As with everything else:
Our Government must argue over the means by which we come to an end.

The Bipartisanship of our government causes an Implementation Lag-
This is the time it takes for the government to draw up a plan and execute.

Let’s say that it now takes from T2 to T3 for the Government Officials to finally agree to a plan and implement it.

I’m being very generous illustrating it as less than the Response lag.
Implementation Lags are almost always MUCH longer than response lags.
Politicians don’t tend to get along well when it comes to money.

So as you can see- By the time that the government is responding to the crisis- we are naturally out of the Crisis and on our way up.

Atleast this must be where the lagging ends.

Wrong.

The government and our checkbooks have managed to make it through the Response Lag and Implementation Lags now.

The Recognition Lag is caused by the time it takes for Government’s actions to actually affect the economy.

Money takes time to Spread

As money is spent by the government and taxes are lowered- two things start to happen.

While highways are being built, schools are being built, people are being employed to perform meaningless tasks- money is being pulled out of the Government’s coffers (actually Lenders’, but that’s another post) and put in the peoples’.

Brokers in New York and across the country are also regaining their confidence in the economy.

These sort of events take time.

As you can see in the picture- By the time we reach T4, we have already come fully out of the dip- and the government stimulation has pushed us into an unnatural boom.

This boom MUST come back down to even out with the long term trend (because growth beyond the maximum can’t be sustained by the economy in the long run) causing an even worse recession.

This is Why the Government Can’t Help!

As the government tries to help, good intentioned they may be, they simply are unable to respond quickly enough and in the end do more damage than good.

Why are the feds and the investors making such a fuss about our current banking crisis? The American Car industry is in the very same condition as the banks, yet there is no $700 billion bailout plan put in place for them. What’s unique about the banking industry that requires so much extra attention and concern?

In the American economy all business is done between households and firms. This business is done in the Final Goods Market and the Resources Market. Goods like televisions, cars and lamps are sold in the Final goods Market by firms to the households in exchange for revenue. Resources used to manufacture these goods such as Labor and Raw Materials are purchased by the Firms FROM the households in exchange for income for the homes.

Though it may seem that the Firms actually own resources like raw materials, they don’t. Firms are divided into shares and shares are owned by households. (Even the CEO belongs to a household) So all resources are actually transitively owned by households, and must be paid for.

So if a firm produces a television for $1000, the homes must have been paid $1000 for their resources (including labor) — They then return that $1000 in exchange for the television.

Economy in a Nutshell

Theoretically, this is the way our economy should work. We have a problem though. Americans save some portion of their income. On average Americans spend about $0.75 out of every dollar they earn. For our example, let’s be conservative and say that they spend $0.80 out of every dollar and save $0.20 — This would mean that though the Firm had paid them $1000 for resources and manufactured the television, the households would only be able to spend $800 in the Final Goods market.

Clearly, our economy needs some sort of system to re-funnel that savings into the market. If not, the Government will be required to continue printing money to meet the need of a growing market and shrinking monetary supply, which will cause inflation to skyrocket.

And So We Have Banks

So we introduce the banks. With banks, people no longer keep their money under their mattresses, but invest it into savings accounts instead. The banks then re-lend this money to firms and households.

Let’s say that the bank takes the $200 invested by the households and lends $120 to the firms (who then reinvest it into the Final Goods Market) and $80 to the households (who then purchase more goods from the final goods market). We now have our full $1000 returned to the Final Goods market.

Banks act as a means of putting money from savings back into the spending market, completing the cylce, and solving the problem of savings.

In the American Economy the banks serve as a way of re-funneling the money saved by Americans back into the spending market.

Without the banks, we are destined to suffer the constant reprinting of the dollar. Inflation would run rampant causing Wall Street to collapse (sounds awfully familiar…).

This is why the Feds are so concerned by the potential collapse of the Banking Industry. It has only happened one other time- 1928, the cause of the Great Depression.

Will our economy survive the current recession without a huge collapse?