QUESTION: Might you clarify this response you gave on one of your very recent blogs. You said bail-in may NOT be permitted on US soil. Did you mean that despite the laws written in the USA to allow it, you don’t think it is likely to happen to USA citizens banking in the USA?
OR were you only meaning in regards to overseas banks with locations within the USA would most likely not use bail-in.
OR because of all the EU money fleeing to USD/USA that the banks stable in the USA (for now) and thus no bail-in needed?
Do you think there would EVER be the case for a USA bank bail-in? Or is this just more conspiracy talk? For obvious reasons, this is of great concern to all of us as this USD repo madness, liquidity crisis and DB’s derivative contagion begins to spread throughout Europe into the next ECM turn in mid-January 2020.
Thank you in advance for your efforts and response to this question.
ANSWER: The bail-in laws were passed during the last crisis which was a popular response at that time because no bankers were ever punished for what they did in New York City. To the extent that FDIC exists, they would certainly honor that or it would be political suicide. However, the fine print is FDIC cover per person. Putting money at 5 different banks would seem to get around their limitations, but I would not count on that.
The gray area comes in two aspects.
- First, there are at any given time money from one bank which can be at another (REPO) which is also why there is a liquidity crisis
- Second, there are business accounts which exceed $100,000
The problem with a bail-in is that the ramifications would be far worse than the Great Depression. You would destroy businesses that would then be unable to make payroll and the unemployment would be massive – far greater than the 25% high of the Great Depression.
The BAIL-IN policy of Europe is a different animal altogether. This has nothing to do with bailing-out bankers. This stems from the refusal to consolidate debts. If banks failed in Southern Europe, then a bailout would mean money from the north could go to the south. This is the structural design. It is WHY Europe adopted the bail-in, quite different from the question of bankers’ conduct. Germany’s demand to join the Euro was that there would be no consolidation of debts. As I have said, the EU is like a family reunion with the cousin who is the drunk than people smile at, but would never lend him a dime. You can pretend it one happy family, but that is just the surface.
A bail-in would actually be devastating economically. It defeats the very idea of banking for if the burden is shifted to depositors to monitor banks when we have agencies who are supposed to do that, then why do we need governments or pay taxes?
Despite the laws, they were never thought threw and it is a huge difference between a regional bank and Goldman Sachs. The hatred was directed at the New York Banks – and rightly so. Because the federal court in New York City has protected the bankers, they have actually undermined the entire country by their stupid actions.