An excerpt from a new article by Terry Burnham, a former Harvard economics professor.
By Elliott Wave International
EWI's president Bob Prechter has been warning about the safety of the U.S. banking system for a while.
Enjoy this excerpt from a new article by Terry Burnham, a former Harvard economics professor, author of "Mean Genes" and "Mean Markets and Lizard Brains", who spoke at last year's Socionomics Summit in Atlanta.
Mr. Burnham's article appeared on pbs.org on January 30 and was quickly picked up by Zero Hedge.
Last week I had over $1,000,000 in a checking account at Bank of America. Next week, I will have $10,000.
Why am I getting in line to take my money out of Bank of America? Because of Ben Bernanke and Janet Yellen, who officially begins her term as chairwoman on Feb. 1.
Before I explain, let me disclose that I have been a stopped clock of criticism of the Federal Reserve for half a decade. That's because I believe that when the Fed intervenes in markets, it has two effects -- both negative. First, it decreases overall wealth by distorting markets and causing bad investment decisions. Second, the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated) investors and give to the rich (and politically connected).
Why do I risk starting a run on Bank of America by withdrawing my money and presuming that many fellow depositors will read this and rush to withdraw too? Because they pay me zero interest. Thus, even an infinitesimal chance Bank of America will not repay me in full, whenever I ask, switches the cost-benefit conclusion from stay to flee.
Let me explain: Currently, I receive zero dollars in interest on my $1,000,000. The reason I had the money in Bank of America was to keep it safe. However, the potential cost to keeping my money in Bank of America is that the bank may be unwilling or unable to return my money. They will not be able to return my money if:
Many other depositors like you get in line before me. Banks today promise everyone that they can have their money back instantaneously, but the bank does not actually have enough money to pay everyone at once because they have lent most of it out to other people -- 90 percent or more. Thus, banks are always at risk for runs where the depositors at the front of the line get their money back, but the depositors at the back of the line do not. Consider this image from a fully insured U.S. bank, IndyMac in California, just five years ago.
Some of the investments of Bank of America go bust. Because Bank of America has loaned out the vast majority of depositors' money, if even a small percentage of its loans go bust, the firm is at risk for bankruptcy. Leverage, combined with some bad investments, caused the failure of Lehman Brothers in 2008 and would have caused the failure of Bank of America, AIG, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and many more institutions in 2008 had the government not bailed them out.
In recent days, the chances for trouble at Bank of America have become more salient because of woes in the emerging markets, particularly Argentina, Turkey, Russia and China. The emerging market fears caused the Dow Jones Industrial Average to lose more than 500 points over the last week.
If the chance that Bank of America will not return my money is, say, a mere 1 percent, then the expected cost to me is 1 percent of my million, or $10,000. That far exceeds the interest I receive, which, I hardly need remind depositors out there, is a cool $0. Even a 0.1 percent chance of loss has an expected cost to me of $1,000. Bank of America pays me the zero interest rate because the Federal Reserve has set interest rates to zero. Thus my incentive to leave at the first whiff of instability.
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This article was syndicated by Elliott Wave International and was originally published under the headline "Harvard Economist Is Pulling His Money From Bank Of America". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
I am regular reader, how are you everybody? This paragraph posted at this website is genuinely pleasant.
What kind of nit wit puts a million in a checking account? So you took it out and where did you put it?
I'm kind of surprised INO would sponsor this dopey kind of an article.
Jim, that's the most intelligent comment of all! Dopy just about covers it...
I agree, too. I would not follow Burnham in all details.
EWI
largest market forecasting firm?
maybe this is an ad?
oh no, run for the hills. the sky is falling.
before you leave, open an online trading account, and buy some Atlantic Power for 3.00 per share down from 50.00 that pays 12%. You may as well make your great grandchildren rich while you are waiting for the sky to fall.
Dear Mr. "Harvard Economist:"
I am shocked and so disappointed that INO would allow such an inflammatory headline followed by your nefarious story aimed a BOA. Everyone that knows a little something about the market, knows that the purpose of your story is to bring the price of BOA stock down because you are either so short the stock that your pants cannot stay on your waste, or, your have positioned yourself to profit handsomely on any downturn in the recent run-up in BOA shares.
It is one thing to criticize the FED for its monetary policies and market interventions. However, to suggest that BOA is the only financial institution at risk for its investments in emerging markets is laughable. What is even more perverse is the notion that BOA would be the only bank unable to fulfill the requests of depositors if a run on the bank occurred.
I suggest to all readers of INO that in the next few weeks or perhaps a month, you hear will hear of a significant hedge fund or large US banking institution gone completely bust because it has found itself on the wrong side of a BOA trade. In fact, we should all thank “Mr. Harvard” for his buy recommendation on BOA and at the same time, question INO editors as to why they would allow such a disreputable story like this to be placed on their site using “Harvard” as an authority to manipulate its readers.
I think another important reason to pull your money from the bank is inflation...
It gets even more interesting if you would have had wanted to borrow One Million Dollars (same amount-practicaly your own money) from Bank of America......how much would that cost you? Boroving your money from the Bank of America!
That would really be funny!!! I want to only borrow the $1M i deposited for which I have received Zero dollars interest. So, i will pay you 4% for the privilege of borrowing my own money for a period of time. Oh wait, you mean the bank won't lend me money because I am a credit risk because I lost my job yet have all this money in the bank. I see, if I reduce my request on borrowing to 100,000 and pay a premium on interest to 5% because I may default in paying back my own money and, you say, eliminate my credit cards so I don't have the plastic to spend freely, you will lend me the $100,000. I feel much better now. Vaseline anyone?! True story. Sort of happened to me- not exact but close enough to bring out the rage.
Sorry to tell you this Mr Burnham but if BOA goes down so does Citi and the other TBTF banks which means that no matter which bank you have your money in due to the bail in legeslation that was put in the Dodd Frank finance bill will cause you and me and most everybody else to get their deposits consficated. Its like this - small banks and credit unions etc use overnight deposits to those same TBTf banks and in this way all accounts in all the banks that do business with these large institutions will be consficated. The FDIC and BOE working paper have said that if this happens that the depositers will get an interest in the failed bank (take that to the grocery store or pay your house payment etc etc) and therefore the FDIC said they will not reimburse you and me and US due to the fact we got something in return for our money -worthless or not AKA there is your bail in. Oh and by the way due to the way creditors are paid those who hold derivatives losses are considered supreme creditors also consider the deivatievs market which is unregulated is worth an estimated 700 TRILLION in value and I think you now see there will be nothing for anyone but the super wealthy. I can send you a copy of the working paper of the FDIC and BOE colaboration on this if you want. Let me know.
Very important point about the small banks/credit unions making overnight deposits . . . would like to know more about that. Are the overnight deposits limited in terms of a percentage of their total deposits?
Sorry Steve I only have a broad outline of this looming disaster and am not prevy to the innerworkinga of the banking protocal regarding overnight deposits. I did contact a couple of credit unions in my area and neither were even aware of the potential bail in language of the Dodd Frank bill or the implications theirin - one was second in command of the institution in fact.
I wouldn't worry. A bigger problem is the free market radicalism that has gripped this country and caused it to export all its jobs and kill its unions. If we had grown wages from 1970-today at the same rate as 1945-1970, then the average person making 50k a year today would be making close to 90k a year in inflation-adjusted terms. And that is not even counting the higher growth rate we had from 1945-1970 vs 1970-Present! Of course we wouldn't have had the cocaine high of housing prices shooting up and stocks going from their traditional P/E ratios of 12 or so to the stratospheric levels we've seen recently, but that's what it means to live in a balanced society that builds what it consumes.
Dodd-Frank causing deposits to get confiscated? That sounds like right-wing conspiracy talk to me. Or right-wing media. There is not much difference between the two nowadays.
Do you have any evidence or is this just speculation?
By the way, intra-bank loans, which run between one bank and another are completely different than FDIC deposits, which are from a bank to an individual. Of course the FDIC isn't going to reimburse that bank! It is going to wait and see if it goes out of business and then reimburse the depositors the insured amount. It sounds like whoever wrote that speculation was confused about what the FDIC actually does.
Its not necessary nor should you believe in me or anyone else - use your due diligence on this mater and be willing to accept what you can prove to yourself. There is a great deal of information involved but I am putting relevant links to areas that can at least get you going in the right direction if you are really interested.
This PDF link pertains to the BOE and FDIC working paper on the subject of TBTF institutions - note the term bail-in and do a Ctr. find for the tem but you really need to read the context and get the underlying thought behind it.
http://www.fdic.gov/about/srac/2012/gsifi.pdf
Attorney Ellen Brown Blog - Web of debt - you will have many areas of info if you look around regarding this issue
http://ellenbrown.com/
A somewhat lengthy but extremely informative dissertation on the history and implications of Dodd Frank
http://larouchepac.com/node/26726
If he's been "a stopped clock of criticism of the Federal Reserve for half a decade" he must know what a salmon feels like swimming upstream... Even he has to acknowledge things are just a tiny bit better than 5 years ago in whichever way you look at the market. He's been sitting on $1m in a non-interest-paying account in all that time - and he's an economist??? That tells you all you need to know about economists.
What point is he really making? Is he altruistically warning everyone to withdraw whatever they have in Bank of American? Or does he just feel like shorting BAC and thinks this might scare the market into selling it off? Beats me.
One thing in all the chaos hasn't changed, IMO; Bank of American is still too big to (be allowed to) fail. Hot air, or am I missing something?
I think what the author is saying is that there is great risk in believing that the system, as it's presently constructed, will come to YOUR rescue if there's a derivatives or credit shock. After all, FDIC has ~ $30 Billion backing over a Trillion in deposits. All this is predicated on nothing going wrong. Consider the Fed's decisions over its illustrious history.
Excellent points, Nigel. At least he is better than Mises, whom Mark Hulbert tracked over several decades and was creamed by "Buy the indexes and hold". Of course, when the market tanked, Mises was first to shout, "See, I was right, all that stuff I wrote back in the 60s and the 70s and the 80s, and the 90s and the 2000s. The 2008 crash proves it!"
Or actually, he didn't say it exactly that way...