From Reuters: “I would not rule out the possibility that at some point we may need to tap into (short-term) lines of credit with the Treasury for working capital, not to cover our losses,” Chairman Sheila Bair said in an interview with the paper.
First of all, do you really think that FDIC can sell the assets of the failed banks at the prices that FDIC thinks they can fetch? So far, FDIC has been paying 50% of the uninsured deposits immediately. I think that’s simply ridiculous, especially in the case of IndyMac. For some banks, their net worth can be negative. There may be nothing left but debts after selling everything off.
So what does that mean when FDIC borrows from the Treasury? Since the Treasury is the only agency with the power of issuing debts (up to the debt ceiling approved by Congress), it is the same as printing more IOUs on the backs of taxpayers to bail out the bank depositors. Obviously, it’s the banks who are at fault, who lent money to those housing speculators and fraudsters, but it will be every citizen in this country who will share the burden.
I don’t know whether there will be any financial reactions to the FDIC borrowing money from the Treasury. But to me, it is just another sign that the whole system is broken. All bailouts and debts eventually lead to the Treasury issuing bonds. And at the point when there is more borrowing needed than foreigners are willing to buy, the Federal Reserve will need to come in and monetize the debt (print the money out of thin air). Supposedly, we should see an increase of Treasury paper holdings at the Federal Reserve, but I doubt that is going to ever be shown to the public. I think we will see an increase of debt issuing, coupled with lower percentage of foreign banks taking up the debts.
And by the way, we will all be on the hook for the $5 trillion in debts that is owed by Fannie (FNM) and Freddie (FRE), whose values are back by the homes going down in value or going into foreclosure. Effectively speaking, the US federal government will own close to 50% of all the US housing market (debt). I guess we’re on track of nationalization of the US housing market. Think about it. What is the difference between communism where the government provides housing to everyone, and a failed capitalism where the government lends the necessary money for everyone to buy the homes? In both cases, the government effectively speaking owns the homes.
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