(and Why We're the Last to Know When there is a Problem)
Bankers are drunk, addicted to profits and don’t sleep much, but if they did there are two things that might keep them awake at night. The first is a consumer run on the bank’s vault cash, (a symbolic gesture of physical cash on hand from days gone by) which is probably at around the 2-3% level these days. The second is that cash is nearly impossible to control, while digital numbers money is easy to seize, hold, manipulate and control. Dreaming bankers prefer total control without the messy bother of rogue cash (or certainly, cryptocurrencies like Bitcoin). No one knows exactly what may happen, or when, but we can project a scenario by dragging out some of the bank’s old playbooks.
The dress rehersal for unbridled leveraged debt investing gone sour was Long Term Capital Management, a Greenwich, Connecticut hedge fund run profitably for 4 years using advanced computer models. By 1998, though, they had equity of only 3% and the bond market turned, leaving them exposed for over $4 billion. Private deals with investment banks bailed them out, averting a catastrophic financial disaster. You’ve probably heard of investment advisor, Jim Rickards, who was part of the legal team that brokered the bailout deal. Here’s the point – you and I never heard about the deal, let alone the problem, until it was over. When these financial meltdown things happen, they aren’t in the news, they are addressed quietly. You won’t get advanced warning to withdraw cash on the morning drive news or on Facebook. You will get the notice that your account has already been frozen, though. Gee, thanks.
Our financial meltdown of Bear Stearns and AIG in 2008 also reached critical mass in private, until the banks and Federal Reserve privately concocted a bailout plan, putting the weight of the Wall Street gambling losses on the shoulders of the American taxpayer for $800 billion. Lobbyists and Fed spokespersons pushing this through Congress in just a few days were quoted telling congressman that the United States would experience Martial Law and a 75% drop on Wall Street if this bill was not passed. Again, the problem never came to the surface until the bankers had a solution to sell us. We, the public, are not privy to bad news, and the solutions are always rush, rush. Somehow, they usually involve reaching in our pocket for money, too.
Ex Goldman Sachs chair, Jon Corzine lost over a billion dollars in his company, and on reported threats of death by his creditors, he chose to “bail-In” his depositors supposedly segregated funds as his company, MF Global, hit the skids. It seems that this was a test-run for actually using depositor's money to bail out corporate banking debt. No one went to jail. One might imply that it was a successful test... unless you're a depositor.
When Cyprus was unable to pay its debt obligations to the European central bank, they demanded a “Bail In”. On Friday, everything was normal. Over the weekend there was a bank “Holiday” which froze all accounts and even ATM withdrawals. By Monday, depositors found that they had taken a 30% “haircut” with their funds on deposit. Again, these problematic crisis situations do not, historically, come with any warning to the public. Banks act for their own interests, in stealth, taking depositors by surprise, for maximum control and profit.
For this reason, you can easily see that you or I are not nearly high up enough on the food chain to have advance knowledge of these crisis events. We discussed before that the FDIC has only 3 cents insurance for every hundred dollars on deposit, and banks can legally create loans up to 90% of funds on deposit. Furthermore, since we have been so compliant in embracing digital statements, digital transfers and using the convenience of plastic, banks rarely keep more than 1% of deposits in physical cash. Estimates vary but many feel that there is only physical cash to cover about 3% of deposits. Just don’t cut in front of your neighbor to withdraw money, it’s not polite. Wait patiently in line like the Greeks did, hoping that there was still money in the ATM when the banks closed for two weeks.
So, that leaves us in a digital world, where 97% of what we do happens on computers or smart phones or even inside ATMs. We saw in Greece in July 2015 that banks can close for a week or 2 and that ATMs can be severely limited or just out of cash.
My point is that numbers on a screen are not money in hand. A computer program or an electrical outage can severly distance you from your currency numbers. You might be comforted by knowing that it is there safe in cyberspace somewhere, but the gas station owner may not be interested in your frozen plastic card account, even if you bring hum your bank statement, and you probably won’t get too many groceries or water at the supermarket cleanout with a promise to pay later when the lights come back on.
Ask people in Greece who were forced to live on about $70 a day in ATM withdrawals if they should have withdrawn some cold hard physical cash before the bank closures. You know the answer. A word to the wise.
So, banks hate cash. It is a nuisance, and since banker gamblers are feeling their machismo, they are craving control. Like it or not, we need to face up to the fact that numbers on a screen are in their control and cash in your hand is out of their control. They don’t pay interest anymore, and most banks, especially the large ones, are running up a huge gambling debt that, one day soon, will come crashing down on them, and probably you and me.
Let’s be smart, people, and withdraw our cash, at least some of it, from the digital grips of people with a big gambling problem and their own interests in mind. You are perfectly capable of managing a few hundred or a few thousand dollars in cash on your own. I suggest doing that, maybe gradually, but soon. And, there is an added benefit – you won’t beleive how well you sleep knowng that you can actually touch your money and that there is nothing between you and your currency. Lets be smart and not participate in the inevitable flurry of stress that will accompany impending bank failures and closures and ATM limits from the greedy gambling habits left over from the 2008 non-recovery. Every family in America lost thousands in that bailout. First time shame on you. Second time, shame on me.
Be a role model for responsible banking to your friends and family. Be the trust you want your bank to be. Hold your own cash.