At a cash flow game meeting earlier this week, a discussion about bank CDs surfaced. Some people were claiming that a bank CD is safer than other assets (in this case, gold and silver). Their justification was that those deposits are insured by the FDIC (Federal Deposit Insurance Corporation). However, a saving account or a CD in the bank is perhaps one of the most riskiest moves right now because banks themselves are in a very risky position. We will discuss the various reasons why investing in a bank CD is considered a dicey move.
First of all, the banks have numerous derivatives of European sovereign debt, also known as credit default swap (CDS). CDS is basically insurance. Like car insurance, the insured pays the premium to the insurance company. In return, the insurance company will insure the owner’s car and they will pay the insured should a car accident occur. Banks (mainly the U.S. financial institutions) offer insurance to the European governments in the case of their default. In return, the insured nations will pay the premium to the U.S. financial institutions just like the aforementioned car example. However, this poses a problem because the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are all in deep financial trouble. Once the bigger European nations begin to default (Portugal’s interest rate is currently 14% and is in no position to repay the debt without defaulting), these will trigger the CDS to explode. In other words, the U.S. financial institutions need to pay the gigantic amount of money to these failing nations. Derivative markets are estimated to be a $1.5 quadrillion market which will contribute to the greatest financial collapse in the United States. If you are fully aware of what is really going on, then it is clear why the Feds are stepping up to bail out the Euro Zone with the U.S. taxpayers’ money and why Treasury Secretary Timothy Geithner and President Obama continue claims to assist the Europeans. The true agenda behind this is to serve the U.S. banks, not assist Europe. If they don’t do this, all of the U.S. major banks will crumble to bankruptcy.
Secondly, the U.S. government has temporarily suspended the accounting rule called FASB 157 (Financial Accounting Standard Board). FASB 157 is also known as the mark-to-market rule. This basically states that all the corporations must adjust their asset values based on the market value every quarter so that the financial statement reflects their most updated and true financial condition. Thus, the corporations holding toxic assets have to realize the loss, and if the liability exceeds the value of the asset, then it has to go bankrupt. However, the “Too Big To Fail” banks are the exceptions. The government allowed big banks, such as Bank of America, Citibank, and JP Morgan to keep their original market value of the properties unless they foreclose their properties. The reason is quite simple because of the high quantity of toxic loans possessed that only could lead to bankruptcy unless the government suspends the mark-to-market rule. The market value of the houses they own is lower than the loan amount. Though this is defined as the mark-to-market, it is more like a mark-to-fantasy rule.
To add fuel to this, over 2 million houses currently not in the market are known as the shadow inventory. Why do they hide all the inventories? The reason is also very simple. Ask yourself what would happen if these housing inventories appear in the market all at the same time while there are absolutely no buyers? Housing prices would tank as supply would exceed the demands which would surely wipe out all the banks. This accounts for real estate prices to continually decline and stay low for a long time similar to Japan’s lost decade (2 decades now… ).
Finally, the FDIC is basically bankrupt. There is no money. According to the trusted sources, FDIC’s assets account for only $3 billion, but it has currently insured trillions of dollars of the bank depositors’ money. In anyone’s eyes, how can an agency with only $3 billion in assets insure trillions of dollars of depositor’s money? It is just absolutely bogus.
In essence, all the banking systems are toast. The only plausible outcome would be another Lehman moment (with steroids) due to the Euro Zone debt collapse and the Feds running its printing press at unprecedented rates in the effort to keep all the banking system afloat for those mentioned reasons. Currently, its inflation rate already exceeded 10%, yet the rate is expected to rise. Frankly, 20, 30, and even 40% inflation will hit us in the very near future. If this happens, can the people at the cashflow meeting still claim this statement “1% CD from the bank is definitely safer than other investments” as truth with a straight face? If people understand the true state of the current banking system, it is then impossible to even consider setting aside investing in a bank CD.
On the other hand, the other people in that same meeting explained that any investments can be risky if you don’t know what you are doing. This is absolutely true. A real estate investment with an ROI of 100%+, for example, does not have to be a risky investment. In fact, I am investing in a short-term hard money loan and I will get the money back soon because the annualized rate yields 14% per year compared to a 1% CD in the bank. A 14% return is quite low among my investment choices, but at the least, utilizing this vehicle reaps far greater benefits than the conventional CD or a saving account that pays almost nothing (I am able to invest because this is a 1-year hard money loan. Otherwise, I would not park the money there). The point here is financial education reduces the risk. You can virtually eliminate all the risk if you are financially-educated. On the other hand, even a 1% bank CD can be very risky if you don’t know what you are doing. Education is the critical component of financial success in this economic condition.