By Kenneth Schortgen Jr
There is an old axiom in the world of stock markets, which is, you cannot catch a falling knife. This analogy refers to the fact that when a stock or entire market begins to sell off, it is usually the insiders and big fish who are able to get their money out by making the first moves, while everyone else attempts to sell with few buyers and in the end, lose their shirts.
It is the same way in banking, where institutions hold very little of the their total deposits in-house, and when a bank run starts, only the first few people are able to get their money out. So when a Harvard economist with over a million dollars in a big bank publicly chooses to take it all out, then every other depositor needs to take this warning seriously as trust and confidence in the banking system continues to fade.
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.
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. – Terry Burnham, PBS.org
As Professor Burnham points out, it is the monetary policies of the Federal Reserve that make holding assets inside of banks a risky proposition. Besides the fact that the central bank’s ZeroInterest Rate Policies (ZIRP) has led to little interest paid to customers on their deposits, new Dodd-Frank provisions now place your accounts as an unsecured creditor, where the bank is the true owner of your money every minute you continue to keep it stored in their system.
Last week we saw HSBC attempt to invoke capital controls on customers seeking to withdrawal their money from the bank, and it was only through a massive public outcry that the bank revoked its intended actions. The bottom line is that nearly all ‘too big too fail banks’, along with a majority of medium to small sized institutions, are teetering on the precipice of insolvency, and any day a single collapse of one could trigger a bank holiday of extraordinary proportions and leave depositors with no recourse to withdrawal their funds.
Another axiom in investing which carries over to the banking sector is if you want to makemoney, do what the rich do. And as investors like George Soros, Jim Rogers, and Warren Buffett have quietly sold off majority stakes in the U.S. stock markets over the past year, when you see large depositors like millionaire Professor Terry Burnham not only withdrawal theirmoney from a major bank, but also announce it publicly, then it might be beneficial to everyone to look very hard at where they keep their money deposited, for as we have seen in Cyprus, Russia, and MF Global in the past 24 months, a bank collapse will happen swiftly, overnight, and in the end, your account deposit may no longer be what you thought it was just one day before.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, and hosts the popular web blog, The Daily Economist. Ken can also be heard Friday evenings giving a weekly economic report on the Angel Clark radio show.
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Contributed by Secrets of the Fed of Secretsofthefed.com.