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Wednesday, August 26, 2009

It Ain't Over Until It Is Over

Wise old Yogi Berra got that right. A brand new problem is emerging from the debris of the Great Recession Bailout. The Federal Deposit Insurance Corporation is the organization that takes over failed banks and sells off their assets. It also guarantees that your deposits up to $250,000 will be paid.

The FDIC funds this activity with a fee it collects from member banks. Now here is the problem. The FDIC is just about broke. There are an increasing number of small and medium size banks going broke. A year ago, the FDIC had 252 banks on its "watch list". Today, it has 305.

The FDIC has just two ways to replenish its coffers. It can raise its fees on member banks, which can be expected to push more banks off the cliff. It can also borrow money from the U.S. Treasury, which will flood the economy with even more money (read inflation).

You may ask, why are these banks now in trouble? And the answer is that they have been avoiding valuing correctly, or selling, the home mortgages they have on their books.

Look at it this way. They have been kicking the can down the road and now the road is coming to an end.

So the message here is this: Beware of the happy talk clowns in Washington who want you to believe the Recession is over simply because some companies are beginning to replenish their inventories.

But Paul Krugman's question remains appropriate, "Who is going to buy all that stuff?"

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