Will My Money Be Safe?

I’ve heard from many, many readers over the last week worried about the country’s current financial situation and worrying whether their money is safe. My response is that unless you’re doing something highly risky with your money, it’s probably safe. Let’s walk through some of the information you need to know.

Cash accounts (savings, CDs, etc.)
Virtually every savings account in the United States is insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. In short, the first $100,000 of your savings account balance is guaranteed by the federal government. FDIC insurance covers checking accounts, savings accounts, trusts, and certificates of deposit.

If your bank collapses and your account has less than $100,000 in it, you’ll transparently have your account moved to another bank with the same balance. There may be a hiccup in your interest earnings, but that’s all. If you have over $100,000, your first $100,000 will be moved transparently as described above, while the rest has at least some chance of being recovered, as depositors get first crack at the assets of a failed bank. Here’s detailed information on how the FDIC handled the failure of Silver State Bank in Henderson, Nevada.

If you are concerned about your bank’s liquidity, I’d take the advice of CNBC’s Carmen Wong Ulrich and immediately get a paper copy of your most recent statement. You can use this as at least some form of paper trail if, for example, you’re hit with identity theft right as your bank fails. I’d do this fairly regularly, especially if I were a customer of a bank that has grave concerns.

Money market accounts
Some people have expressed particular concern about money market deposit accounts, especially after the Primary Fund actually lost value a few days ago, the second time any money market fund has ever lost money.

First, there’s a difference between a money market deposit account and a money market fund. The former, a deposit account, acts much like a savings account for most people with a varying interest rate. These are FDIC insured. If you have a money market account down at your local bank, it’s insured just like your savings account is.

A money market fund is an investment vehicle that is meant to be a very safe place for people to park cash in large investment accounts. They generally have a very low rate of return, but they’re usually incredibly safe in that low return. The Primary Fund lost some value recently, meaning that the fund had a negative rate of return for a short period because the fund owned some assets controlled by Lehman Brothers. When Lehman Brothers went poof, The Primary Fund realized they weren’t going to get their money back, so they wrote it off as a loss, and that loss made the entire fund lose enough value that it was suddenly worth less than what had been deposited.

In short, if you have less than $100,000 in your money market deposit account, you really don’t have much to worry about.

Investment accounts
What about other investment accounts? First of all, no investment account is insured against market risk. If you own a stock and the value drops, it’s not insured – you’ve lost that money. Insurance only matters if the company managing your investment account fails.

IRAs are actually guaranteed by the FDIC up to $250,000, as described in their FAQ. If the company managing your IRA fails, the FDIC will step in and take care of it up to the first $250,000, moving it to a new manager.

And other investments? Most other investments are insured by the SIPC – the Securities Investor Protection Corporation – for some amount, usually $500,000. You’ll want to check with the specifics of your account to make sure that it’s insured – dig into the fine print.

The procedures for failure of an SIPC account are much the same as an FDIC account failure – it’ll be gradually transferred to a new brokerage. And, as with FDIC accounts, if you’re worried, make a paper trail. Print off all the information you can and have it on hand.

Are all these programs stable?
Obviously, the advice I’ve given above is predicated on the stability of those government programs. Are they stable? To put it simply, if they’re not stable, the United States itself isn’t stable and we’ve got much bigger problems than such insurance programs. Given the amount of money flowing into the federal government in terms of tax dollars, I would tend to believe that the FDIC and SIPC will never fail unless the country is failing, in which case $100,000 will have roughly as much value as Monopoly money.

In short, I wouldn’t worry about it unless you’re actually under the belief that the United States is about to fail.

What should I do?
The first thing I would do if you’re worried about these issues is make sure your accounts are all FDIC and SIDC insured and have a master information document so you have your key account information at your fingertips.

I would also print out copies of online statements from my banks and brokerages and keep any mailed statements, just as a matter of course.

One final step: get informed about politics. Surely, you now realize that this financial situation is serious. The root cause of it can be found in Washington. Do the research and find out where each candidate stands on the issue of the day. How will they handle the economy? What do their histories say about their ability to handle economic situations – did they handle them well in the past? What about their key economic advisors? Are the candidates prepared to lead? Are their running mates similarly prepared? Get independent facts – that means not relying on Fox News if you’re leaning conservative and not relying on MSNBC if you’re leaning liberal. Read the candidates’ Wikipedia entries. Read where they actually stand on the issues. Most important of all, decide, in your heart of hearts, what issues really matter to you – don’t let personalities and a desire to “break barriers” or trivial issues like marriage rights swing your vote at all. The real issues this time are too important.

(Kindly do not clog the comments with political commentary – any mention of any candidates will be deleted. The topics here are more serious than that – let people do their own research and make up their own minds.)

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  1. Ang says:

    I rarely comment on websites but I have to point out that Wikipedia is not an appropriate source to get independent facts, especially on political candidates, since the entries can be frequently altered by both sides.

    You can visit the candidates own websites to find out what economic policies they advocate and who their economic advisers are. You can also check the Republican and Democratic National Parties’ platforms to see where the parties stand on economic issues.

    Don’t stop at only Presidential candidates, remember that Congress plays a major role in economic policy and all representatives are up for reelection this fall as well as 1/3 of the Senate. Go to this website to find your representative:

    http://www.house.gov/htbin/zipfind

    To assess the accuracy of political claims and commercials these websites may also be helpful:

    http://www.factcheck.org/
    http://politifact.com/truth-o-meter/

    You can also use google news to read articles from multiple news sources to compare for bias.

  2. John says:

    Trent,

    On Money Market Funds, one distinction or error you made in your post is that a few money market fund went below the $1.00 mark. You made it seem like all money market funds lost value; the Vanguard Money Market Fund was fine for example.

    There is no Primary Market Fund as you state, rather many, many individual money market funds run by various banks, investment houses, etc.

  3. Tommy says:

    You might also want to do something to protect your money from inflation. Most of the current crop of bailouts come not directly from the Treasury but from the Fed who print it.

  4. zoz says:

    Marriage rights are hardly trivial to those to whom they are denied, and they are actually an economic issue as well. I feel sorry for your wife if you view your legal status with her as “trivial”.

  5. Rosie says:

    Marriage rights aren’t trivial. They are a pretty good barometer of the tendency to let personal religious beliefs dictate legislation.

  6. Evan says:

    Great post! Note that FDIC insurance only applies to self-directed retirement funds held as deposits at an FDIC-insured bank (such as IRA certificates of deposit). The FDIC does not guarantee self-directed retirement funds invested in stocks, bonds, mutual funds, real estate, or other such investments.

  7. ChrisB says:

    As hard as it might be for folks like Thomas Frank to realize, not everyone’s horizon is dominated by economic issues, even in the middle- and lower-classes.

    I hope people will consider the complexity of the issues dominating the news this week and not fall prey to either candidates’ rhetoric or proposed quick fixes… the roots of the problem are deep and intricate, and we aren’t served by more hot air.

  8. Adam says:

    It is important to point out that the $250,000 in IRA FDIC protection is limited to deposit products. So, if you have an IRA with Wachovia and it is invested in Wachovia CD’s or their money market deposit account, you are covered up to $250,000. However, if you have an IRA with Wachovia and the money is invested in mutual funds, then you DO NOT have the FDIC insurance. SIPC will not cover you if you investment declines because of market conditions. SIPC will only cover cash in your brokerage account or securities of yours that the brokerage lost.

  9. Kathleen says:

    Two comments – first, I wholeheartedly agree with zoz that marriage rights are not trivial and are in fact an economic issue as well as a social issue. Second, I hope that this past week reinforced the idea that no one should be investing in ANYTHING that they don’t understand from both a mathematical and risk perspective. If you can’t explain how your investment makes money for you and what could cause it to lose money, you shouldn’t be buying it. Period.

  10. April411 says:

    You’re the one who brought up politics and you expect us not leave political commentary. Like a previous poster commented, some people have other issues that they are concerned about besides the economy.

  11. Jason says:

    Small typo in your 4th to last paragraph – you say SIDC when you mean SIPC.

  12. Jasmine says:

    Marriage rights are only trivial to those who aren’t denied them.

  13. Charlie says:

    One note about FDIC coverage: An individual gets $100,000 coverage on singly held accounts, and another $100,000 as a joint account holder so a couple can have $400,000 total at any one bank. They can each have $100,000 as single account holders and then an additional $100,000 each in joint accounts. It does not matter how many single and joint accounts you have just the way they are held (single or joint). So if a person has a lot of money (but still under $400,000) and has a trusted loved one to hold half the money jointly with they can keep all of the $400K at one bank if they wish. Sorry, that wasn’t written very well so I hope you understand, I can try and explain differently if anyone has questions.

  14. Rachel says:

    Certainly, deposits are insured so you will receive the same number of dollars back. Sadly, those dollars will be worth much less in terms of value.

  15. Michelle says:

    Sorry, my cousin’s right to a legally recognized marriage outweighs my concerns with the economy any day. I’d rather see a complete economic collapse that ends with a society where people are treated as equals than a fantastic economy that ends up denying rights to some of its citizens.

  16. KC says:

    Someone today where I play tennis said the FDIC was running out of money. I tried not to laugh in their face. I also didn’t bother to explain that if they run out of money it won’t matter cause the US government will fail and all of our money will be worthless regardless of whether its insured or not.

  17. Ryan McLean says:

    Hey Trent,
    I am a little bit worried because you are giving out financial advice now and not just teaching people how to do finances. This could be very dangerous for you as if people do what you say and it goes badly then you could be sued…you better watch out.
    I try to steer clear of telling people what to do (like how you told people to make sure it is insured) and I teach people how to build wealth and make more money.

  18. caryn verell says:

    everyone has known for a good while about what was fixing to happen on wall street and what our government was gonna do about it…now, unless anyone preferred to put their head in a sand hole and pretend it wasn’t coming, the past several months if not the past year was the time to take matters in hand. personally, i do not own stock, nor am i wealthy or savvy enough to invest in anything other than the basics to meet my immediate needs. but, my immediate needs are met and PAID FOR. my home, its’ contents and the land it sits on is mine lock stock and barrell. and for the hard times a coming i have stocked plenty of nourishing foods, fuels and bullets. i am continually amazed by the whiners and crybabies whose “wanters” are bigger than their “getters”. get over the greed and be happy or at least content with what you have while you have it. what happened to plain old common sense folks!

  19. Melissa says:

    If you want to know if your money is covered or not, http://www.myfdicinsurance.gov is quite helpful. Working at a bank, I get these questions all the time, especially lately. There are many ways/accounts in which to structure your money so you are fully covered. I believe a couple can have up to 1.2 million insured by the FDIC using single, joint, trust with beneficiaries, and IRA accounts, etc. It just all depends on how you do it; any bank manager worth his salt will be able to help you structure things safely.

    Another thing you didn’t mention; credit unions are also insured up to the same amounts by the NCUA, the National Credit Union Administration. So those with accounts at Credit Unions need not worry!

  20. Brian says:

    Isn’t the very reference to “marriage rights” as “trivial” a political argument? So what issues do rise to a sufficent level of “importance” to consider? Rights of veterans and their healthcare? Condition of the U.S. military after being stretched to the breaking point by a major nation-building mission for 5 years? Success in pursuing a “humble” and “strategically clear-headed” foreign policy? Pursuit of fiscal independence, so that the federal deficit is not ballooning? Fiscal policies that aren’t sustainable, but require tax increases or tax transfers from our children? Loosening of all regulatory restrictions, resulting in near-simultaneous housing and banking meltdowns? Weakening of the oversight of various governmental agencies such that they are no longer able to respond to fundamental emergencies? Attempts to privatize Social Security, putting it into the greedy hands of Wall Street traders and subject to wild market swings? Which of these “fireable offenses” rise to the level of “important”, that would allow us to select one candidate over the other?

  21. PeterR says:

    “If you own a stock and the value drops, it’s not insured – you’ve lost that money.”

    This is not necessarily true unless the stock drops to $0. You don’t lose money until you sell your shares. If you hold on to your shares and the stock rebounds (as many did this week) you’re not out anything.

  22. oneofnine says:

    I am with those who argue back that marriage rights are in no way trivial. Are abortion rights trivial as well? Yes, the economy is of importance right now, but please don’t trivialize your readers moral and ethical principles.

    One other thing– did you actually recommend that your readers take a Wikipedia entry as a credible, unbiased source of information??? Wikipedia is one of the most UNRELIABLE sources of information on the internet. No institution of learning (not even high schools or community colleges) allow students to document or reference Wikipedia as a source. Telling your readers to go to Wikipedia and learn about the candidates is one of the most ridiculous suggestions I’ve ever heard. Tell you readers to listen to ALL the news sources– conservative AND liberal, Fox News AND MSNBC, and then make up their minds wnen they’ve heard all possible viewpoints!

  23. Ken Deboy says:

    When did MSNBC go back to being a news source?

    Ken

  24. Scott C says:

    It sounds as though you believe the US is not in a position to fail. Ben Bernanke just told congress we are potentially days away from a complete financial meltdown.

    “the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.””

    http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html

    The Gov’t has responded by proposing a 700 Billion bailout in an attempt to absorb bad debt. All it takes is for a single major foreign investor (China, Saudi Arabia, etc) to pull their investments to start a chain reaction that will lead to the dollar losing all value. I can see China pulling their investments as an act of “economic warfare” in the belief that they will emerge from the resulting global depression as the world’s new superpower, but regardless of who does it, any one could start the landslide and force other foreign powers to follow suit or risk their investments becoming worthless.

    What does it take for a foreign power to pull their investments? Any one of them would do so if they believed their investment was worthless.. that is, if they believed the US was facing an unavoidable financial meltdown. THIS IS EXACTLY WHAT BERNANKE JUST TOLD CONGRESS. The US Gov’t bailout will slow or prevent a meltdown at home, but it will only make the US look like an even worse investment to those internationally who back the dollar, as it is an admission that our economy is inches away from complete disaster.

    The only thing keeping us alive is the good will of our foreign investors, and as long as they continue to back the dollar the US gov’t can absorb as much debt as it wants. No one wants a US dollar collapse, but once you believe it is inevitable, wouldn’t you want to pull your dollar investments before they become toxic? All it takes is for one major investor to look at the situation this way to start the ball rolling, and we have no control over it and there are very very few warning signs to look for in order to prepare for such a move. In this situation, you either prepare for the worse and hope it doesn’t come about, or fail to prepare and lose everything if it does.

    Sorry for the alarmist tone, but I can’t think of any way to talk about this issue otherwise. Do your own research and please convince me that I’m wrong about all this… I really don’t want to live through a depression.. especially one that promises to be worse than the first great depression.

    The best advice I can think of to secure your assets against a meltdown is to invest in tangible assets like gold coins.. things you can keep in your possession that have universal value. The value of gold has already gone through the roof though, so if you know of assets other than gold that aren’t so severely over valued then by all means invest in those.

    Of course you should only do this if you’re convinced the US dollar could collapse, as Bernanke said could happen any day now…

  25. Mary Ellen says:

    I believe a lot of you have misunderstood the point Trent is trying to make – yes, marriage rights are important and other issues equally important BUT I have a feeling that you don’t fully comprehend what has happened in the past week and just how serious a position we are in – this week has altered the financial position of the US for generations to come – hey, the good old days of the fast buck and overnight wealth are over — things are a changing regardless of who gets elected – we’ve been fighting terrorists overseas and meanwhile we’ve been under attack by the financial terroists on Wall Street.

  26. Allan says:

    The last thing to do is to panic. Buy low and sell high has worked quite well over the years through the Great Depression, oil shocks, Enron, dotcom busts, etc.

  27. Tiffany says:

    Since you emphasized getting independent facts about politics and candidates, I wanted to mention two non-partisan, independent fact-checking sources that are excellent for getting an unbiased view of the statements, attacks, and claims of the increasingly antagonistic election season.

    The first is the Annenberg Political Fact Check at http://factcheck.org/ and the second is Politifact, a joint effort of the St. Petursburg Times and Congressional Quarterly (http://www.politifact.com/truth-o-meter/). The latter is a little more entertaining, with a ‘Truth-o-meter’ that rates how accurate statements and ads from the campaigns are, but both are great resources that investigate all claims thoroughly and cite numerous sources.

  28. Caroline says:

    I was wondering if you’ve ever watched “In Debt We Trust” and “Maxed Out” and what your thoughts were on them? It makes you wonder if the US government will actually fail, and if it’s just a matter of time before it does.

  29. m says:

    What about credit unions? My husband and I have all our liquid money in our credit union, savings, checking and money markets. I will call tomorrow but wondered if anyone could answer it today?

  30. m says:

    Also I would like to thank the world for the money shake up, hubby who had no interest in our finances, paying off the mortgage early, who always bought unnecessary items, yesterday wanted to cut his retirement deposits in half and put the rest on the house to pay it off. I said no on cutting his retirement deposits in our retirement accounts but mentioned about future purchases and if they were necessary or could wait, as we carry no credit card debt it was easy for him to charge every little thing he wanted. I think he finally is seeing the light, just hope it lasts.

  31. P says:

    I tend to agree with Trent that the marriage issue is a relatively trivial one in this election, especially since it’s been up to the individual states to decide on their laws regarding it. Love is what matters and whether or not a governmental entity officially recognizes that love or not doesn’t matter one drop because love is love is love is love regardless.
    Whether or not I, or anyone else, is allowed to marry whomever we choose is indeed trivial when compared to the fact that my money, which is what I exchange 60 waking hours a week for with my employer, 50 weeks per year, and which is my only real medium of exchange for the goods and services that I consume in my life, and which is what I am counting on as my cushion to keep on living when I can no longer work, even though I’ve invested it conservatively at my relatively young age, is in grave danger of being extremely devalued by the actions of some eggheads in offices in NYC who bandy about billions of dollars at the push of a button to squeeze another million out to buy their second yacht. I feel strongly that America is going to suffer some drastic downward changes and perhaps even a revolution within my lifetime. Whether or not me or my neighbor is able to marry those whom we truly love is of no consequence.

  32. Tim says:

    “Marriage rights are hardly trivial to those to whom they are denied, and they are actually an economic issue as well. I feel sorry for your wife if you view your legal status with her as “trivial”.”

    Compared to being able to put food on the table for my kids and losing my life savings, the legal status of my marriage (not reflecting how we live at home) is incredibly trivial.

  33. Brian says:

    Money Market Accounts have lost money before and broken the buck, but the advisory companies have steeped in and made whole the loss so the NAV has not gone below the 1$ mark. This time the they didn’t and now the Govt is stepping in to buy all the bad debt for all MMA’s. The only one who will be screwed is the taxpayer and their children for years will the CEO’s and VP’s of all this companies waltz off with millions in golden parachutes.

  34. KoryO says:

    If you want a good way to figure out if your accounts are covered, the best way I found is to use a site on the FDIC website called EDIE (the online estimator). It can tell you if you need to move your cash or not to get it covered.

    http://www.fdic.gov/edie/

    As for m and anyone else who worries if their money is covered in their credit union accounts, the NCUA (the credit union equivalent of the FDIC) has an estimator you can check at this site:

    http://webapps.ncua.gov/ins/

    SIPC insurance doesn’t guarantee anything other than that if you have 100 shares of Caterpillar (or any other stock….I just didn’t want to lame out and put down XYZ Corp….) and your brokerage goes under, you will always have those shares. It does not, and never has, guaranteed the value at all. I hope that no one took what Trent wrote to mean that it protects you from losses.

    It also guarantees the cash you have on deposit with a brokerage. It does not cover certain kinds of annuities not registered with the SEC, commodities trade contracts and limited partnerships.

    http://www.sipc.org/how/covers.cfm

    Me? I got a toddler. I WISH I had enough in the bank, credit union or brokerage to worry about! ;)

  35. Lorax says:

    There were meltdowns in three money market funds that I’m aware of:

    The Primary Fund
    Bank of New York Institutional Cash Reserve Fund
    Putnam Prime Money Market Fund

    I think all of them were required to break the buck ranging from .97 to .99.

    This is why you should check into the holdings of your money market fund. Conservative companies like Vanguard have low fees, so don’t have to make risky investments to overcome the fees (see _Investing For Dummies_ for more info).

    After Putnam, the feds said they’d backstop money funds.

    T-Bills are probably the safest bet around, or FDIC or NCUA insured accounts.

  36. Lorax says:

    @m

    Credit unions can have NCUA insurance, or not. If not, they might have state CU insurance. State CU insurance is not backed by the full faith and credit of the federal government. Check that you have NCUA insurance. If not, you are at risk.

  37. Brian says:

    I think some of us *do* recognize the precarious situation we’re in. Worst financial shakeup since the Great Depression; greater financial leverage (by a factor of 3) compared to the Great Depression; less regulation than at any time since the Great Depression; a financial bailout leadership team intent on obtaining a blank check with no oversight provided at the expense of taxpayers, rather than more balanced approaches (debt forgiveness, debt-for-equity swap) that would avoid taxpayer expenses in favor of pushing the pain onto the Wall Street wrongdoers. Combine that with a complete lack of media discussion of the underlying causes and culpability of this crisis, and the outcome is clear: The policies of the party that brought us to this point of fiscal irresponsibility and lacking regulation over the past 7 years (and for the past 30, in general) will be repeated.

  38. I agree with Ryan…you always have to be careful with this….

    One more point about the FDIC. I would keep a watchful eye on this. At some point, we can only print so much money. If several banks fail at once, the FDIC will be in trouble. They are already running out of money and the Treasury will back them only so long. I think, at some point, the FDIC might have to change their rules. I don’t think that will be for awhile at these current defaults, but if many fail at once, lookout!!!

  39. Pearl says:

    That last paragraph was a gem; subtle political stab at people you don’t agree with paired with a recommendation for higher learning from the bastard of all news sources, Wikipedia.

    Normally I am a huge fan of this site, by the way.

  40. ChrisB says:

    There’s plenty of blame to go around in Washington; it’s not just one party. For instance, it was in the 90’s that the government essentially demanded that banks start giving mortgages to people with less-than-stellar credit ratings; those are the sub-prime mortgages that we all know about now, and they are among the primary ignition keys of the crisis we are in.

    Don’t make the mistake of thinking this just one party’s problem.

  41. Lorax says:

    @ChrisB

    Selling mortgages to people with less-than-stellar credit ratings isn’t necessarily bad, it just needs to be hedged properly.

    In this case, they created an illiquid and opaque market. And on top of that it was highly leveraged and not regulated. In short, they did just about everything wrong (or better known as free markets run amok). Left to itself, things would have worked themselves out, but we’d probably have a great depression while that happened.

    I’d suggest (once again) Robert Shiller’s _Irrational Exuberance_ and/or _The Subprime Solution_.

  42. gr8whyte says:

    @ m : If you go to ncua.gov and click on the “Consumer Resources” link, you can search their database to see if your CU is state- or federally insured with the NCUA. fdic.gov has the same search service for insured banks.

  43. Lorax says:

    @Kevin

    I wouldn’t worry so much about FDIC… the Fed controls the money supply. They can just print more and hand it out to you.

    Where do you think the money for the last set of Wall Street rescues came from? Poof! It came out of thin air – or actually it’s just some bits on a Fed computer as they issued a special set of bonds.

    Yes, that is inflationary. But odds are that this will be a deflationary environment, so it might not be noticed.

  44. Lorax says:

    Last entry for a while, but for those who are interested in listening to Robert Shiller talk about _The Subprime Solution_, head on over to http://econtalk.org. There’s a podcast there recorded two weeks ago where Shiller spoke about his book.

    (Note that I don’t completely agree with the thrust behind econtalk.org and the Chicago School of economics. But they do have good guests and well thought out arguments.)

  45. Brian says:

    It is one party’s primary fault. The ’90’s were dominated in financial and regulation policy by one man, Alan Greenspan, who was from that party.

  46. ChrisB says:

    Brian, wasn’t he nominated & re-nominated to his post by presidents of both parties?

  47. Bill in NC says:

    “transparently have your account moved to another bank with the same balance”

    Over on the wesabe blog one person who went through this noted they had problems with one direct deposit, and IIRC bill payments as well.

    If your bank is forcibly resold to someone, be prepared to set up automatic payments and direct deposits again.

  48. oneofnine says:

    Pearl, I was so glad to read your comment. Glad to see someone else not only caught on to the marriage issue but the Wikipedia recommendation as well. Perhaps if Trent were not allowed to be legally married to his wife, marriage rights would not be such a trivial issue. It seems that in these unstable times, the thing everyone would like to do is make sure their partner is legally protected– for the people who don’t have that assurance, not being able to be married is HARDLY trivial.

    By the way, I normally love this blog. I felt like the marriage comment along with the Wikipedia recommendation was a double whammy.

  49. AnnJo says:

    If it weren’t so serious it would be amusing to watch people try to blame our current predicament on Greenspan or de-regulation or greedy Wall Street types. Every effort by government to “regulate” markets involves politicians choosing winners and losers, in an effort to remove risk from one group and shift it to another.

    While foolish or lying borrowners and predatory lenders may have been the direct cause of the mortgage meltdown, the indirect cause was the federal guarantee of Fannie Mae and Freddie Mac, which allowed those entities to retain all the benefits of making risky loans while shifting a major part of the risk to the taxpayers. This plan was originally floated during Democrat Lyndon Johnson’s presidency, under a Democrat controlled Congress, and was fully implemented during Nixon’s term, while the Democrats still controlled Congress. Not that Republicans haven’t often gone along, because it’s really, really hard for politicians to tell people they have to save for a down-payment and buy within their means. Home-ownership has been the “chicken in every pot” of many politicians from both parties, and when the inevitable happens, as it is now,”greedy Wall Street” is the easiest to blame, as if there isn’t always enough greed to go around for everybody.

    In fairness to Alan Greenspan, he has been warning for years about the dangers to taxpayers and risky lending practices encouraged by Fannie Mae & Freddie Mac. See http://money.cnn.com/2005/05/19/news/economy/greenspan_fannie/

    Others, mostly a minority of Republicans, also warned all along about the moral hazard problems of Fannie Mae/Freddie Mac, Sallie Mae, Community Reinvestment Act, and other government scams, but they are drowned out by the voices that have always shouted “yes, we CAN have our cake and eat it too.”

  50. ChrisB says:

    Lorax,

    I don’t disagree… certainly the banks and investment firms bear a great deal (the brunt) of responsibility for the problems in which they found themselves. My point was regarding the political context of the issue, and the degree to which both sides of the aisle were complicit.

  51. kentuckyliz says:

    If you have over $100k to save, and want FDIC insurance protection, you can do it through one bank if they are a part of CDARS. You can save up to $50m insured.

    http://www.cdars.com/index.php

  52. Lorax says:

    @ChrisB

    It’s my belief that one side is more responsible than the other. Both sides had good intentions. One to increase profits (yes, that’s a good thing!) and one to get people living in homes (debatable, but probably a good thing).

    But one side didn’t want to regulate the collateralized debt market or the credit default swaps that grew up around them. This is despite an outcry from those in the know. This basically comes from an Ayn Rand-style ideology that free markets will form a perfect market and don’t need regulation.

    It is true enough that the repeal of the Glass Steagall Act was bipartisan – and that helped add speculative fuel to the fire.

    The repeal of the uptick rule got us here faster… and that you can blame on the SEC.

    But about raw politics, yeah. Both parties take lobby money. It’s sad, but true. It’s not all that new, just better reported now.

  53. kitty says:

    @Brian,
    I also recognize (and worry) about the current financial situation. But I am not sure that your approaches are better to bailout (debt forgiveness, debt for equity) are any better. How exactly would this work out with AIG? It seems to me that at least with AIG the government may have gotten quite a deal: borrow money at 3% than lend it to AIG at 11% and get 79.9% of a company whose break-up value is considerably higher than the amount of the loan; also get rid of current leadership in the process. There certainly is some risk with not being able to sell AIG assets within these two years, but there is still a pretty good chance the government will make money on the deal. I noticed on yahoo finance, that AIG shareholders aren’t that keen on this deal. The article said they are urging the company to quickly sell some of its assets and repay the loan. I don’t think the wrongdoers are happy with this deal either. What would you suggested the government did instead? AIG failure would’ve been disastrous given how many banks depend on it.

    The other parts of the bailout aren’t that clear, but again it seems the government wants to buy risky loans but only after reverse auction. If I understand it correctly – they tried to explain it on CNBC today, it means the companies will need to bid the lowest amount for which they would sell these loans or something like it. Depending on the details, they could get them for 40 cents on a dollar. Depending on which percent of these loans will actually default and on the price, this may not be such a losing proposition.

    Some of the past bailouts weren’t bad deals: the government did end up making money on Chrysler bailout. Having government go into controlling companies is a bit scary, though… Will have to wait and see, but it seems to me that it is a bit too early to tell if it would really be such a bad deal.

  54. ^_~ says:

    “The root cause of it can be found in Washington.”

    Why go and blame the government for the actions of the unrelated individuals that caused the crisis?

  55. Bill in NC says:

    I am very surprised that people are foolish enough to think that marital status allows them to ‘protect’ anyone.

    If you want to be able to make financial and health care decisions for any adult loved one, spouse, partner, parent, or other, at the minimum you will need to have power of attorney for both health care and durable POA for finances.

    Though I prefer a revocable living trust to manage finances (banks, etc. have more leeway to say no to a POA vs. a trustee)

    If not, you get to go through the agony that is a guardianship hearing (and spend several thousand dollars)

  56. Trent,

    Last Friday, 9/19/08, a major change in the world of money market funds took place when the U.S. Treasury stepped into to insure all money market funds against loss. This is a HUGE, although temporary, change that effectively makes money market funds as safe as federally-insured deposit accounts. You may want to inform your readers about this change.

    From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a9oT3F7XFBYo&refer=home
    “The U.S. will insure money-market funds against losses for the next year as it seeks to prevent a run on $3.35 trillion of assets that average investors and institutions rely on as a safe alternative to bank deposits. The U.S. Treasury will use an existing $50 billion emergency pool to offset any losses incurred by investors as fund managers cope with the worst financial crisis since the Great Depression. The plan is similar to federal insurance on U.S. bank accounts, though it’s temporary and doesn’t carry the same $100,000 limit on reimbursements, a Treasury official said today on a conference call.”

  57. Kevin says:

    I don’t see where Trent is dispensing investing advice here. He’s merely providing links and info about the various government insurance programs. All of it is information that is easily found in a Google search.

  58. There are a number of facts that make me feel that the possibility of a nationwide collapse is not as unlikely as Trent implies. The first of these is that even before this massive bailout of huge financial companies, fully two thirds of all federal taxes were being used to service debt. Try imagining two thirds of your annual income being applied to your debt. That doesn’t mean you *owe* the equivalent of two thirds of your salary. It just means that your minimum required payments on your debt eat up two thirds of your income stream. That’s the situation we were in as a nation, before the bailouts.

    The second fact is that the major oil producers of the world all take US dollars for their product. That means that Europeans, Asians, and anyone else who wants to buy oil has to buy it in dollars. This is true simply because the Middle Eastern nations that have oil say so. They could change their minds tomorrow about which currency they want to be paid in. Think about this: if you had a valuable commodity, which currency would you want to be paid in: euros or dollars? Would you want the currency of a nation of debtors? Right now, the US dollar is somewhat stable because everyone else *must* buy our currency in order to buy oil. We have absolutely no guarantee that that will continue to be the case. All it takes is someone in the Middle East deciding that they’d prefer to be paid in yen, euros, Canadian dollars, or rubles.

    So now how likely does the total collapse of the US economy look to you?

  59. Brian says:

    Re: Greenspan: He is a Republican, and not only a Republican, but a Randian Republican.

  60. Sylvain says:

    This video [30 mins] sums it all up pretty nicely: http://www.youtube.com/watch?v=XBT052jHnmE&sdig=1

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