Blog - FDIC Insurance and the Illusion of Protection


Published: 09/15/2016

When the value of houses and stocks went into freefall in 2008, a few people began to become concerned about their bank savings. The FDIC, which insures bank accounts, was quick to give extra assurances. FDIC insurance limits on savings accounts were increased from $100k to $250k and Suze Orman was hired as a spokesperson for public service announcements. The public breathed a little easier, and banking went on as before.

In 2009, the FDIC also put out a pamphlet called, somewhat grandiosely, “No Safer Place in the World For Your Money.” The brochure bragged that, if necessary, they could access a $100 billion line of credit directly from the US Treasury that “...under federal law, can be expanded to $500 billion.”

Very impressive indeed, until you consider that the total deposits in US banks is about $5.37 trillion. This pencils out to a guarantee of about two cents on every dollar deposited, unless they raided the Treasury coffers. (And re-appropriating the defense fund budget or the social security trust fund would hardly be a solution.) Other analysts have estimated the reserves to be even less than 2% of deposits.

This highlights a common misconception about FDIC insurance, and banking in general, that your money is somehow "backed" by real-world assets. That is simply not the case. To understand how this really works, let’s take a look at the concept of Fractional Reserve Banking.

Fractional banking is a system in which only a small percentage of bank deposits are covered by cash-on-hand. The actual reserve requirement for banks is only 3 – 10%. This means that a bank can loan out 10 to 33 times what its customers have deposited. When a loan or credit card is issued, the applicant’s qualifications give the bank permission to extend credit, and in this way, money is manufactured out of thin air!

Today, dollars (which are literally "banknotes" representing a promise to pay) are not backed by gold, printed money, or anything stored in a vault. The value of this conceptual cash is determined by the worth that people agree to assign to it in combination with whatever confidence society has in the banking institutions and the government.

The truth is that FDIC insurance would be nearly useless in a real economic crisis in which there was a run on banks of any size. Your cash would still be worth more than Monopoly money, but not much.

Even spokesperson Suze Orman confessed her own moment of panic. In a candid US News Money interview in which she discussed taping an Oprah show during the height of the financial crisis, Orman revealed, “I knew it was possible that by the time we came off that show that the entire United States economy could have collapsed. Our credit had frozen — I wasn’t sure we were going to be able to get money out of our A.T.M.’s."

Suze knows as well as anyone, people can't keep spending money that doesn't exist, whether it's from credit cards or a fractional reserve banking Ponzi scheme. Like Bernie Madoff, banks are betting that they'll never have to pay too many people back at once.

Where is your money the safest?

We believe the best defense is a good offense. In addition to monitoring your bank account for potential criminal activity, keeping passwords safe, and not using your mobile phone for banking, we recommend aggressively saving ELSEWHERE.

While some Americans have responded to fear-mongering by keeping their money in their mattress, we believe there are much better ways to manage your cash.

Consider a credit union for your needed cash on hand. Credit unions have a history of being safer than their banking counterparts. That's because credit unions use less leverage and don't engage in risky investments with their depositors' money, as banks are now able to do. During the 2009 economic downturn, 98 banks out of 8200 went under, while only 11 out of 7846 credit unions failed.

A  good choice for long-term savings is mutual insurance companies.  A properly structured whole life insurance policy issued through a mutual insurance company is an effective vehicle for storing and growing long-term cash. Whole life insurance policies have been utilized by Presidents, executives, successful business owners, and corporations, including banks. Even though the Rockefellers used this as a tool to store and grow wealth, it is still available to everyone.

Mutual insurance companies are owned by the policyholders instead of shareholders. They are not allowed to leverage savings as banks do, nor do they deal in the risky ventures that caused banks and even AIG to fail. Best yet, when held long-term, properly structured whole life policies earn internal rates of return that out-perform any bank savings account or certificate of deposit.

To find out more contact one of our associates today at Summit Life Financial, a division of Nowlin and Associates.

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