TSP Smart: History is Trying to Repeat

In 1929, banks used deposits to invest in the stock market that lost 89% of its value by 1932. Since there was no FDIC insurance, many banks became insolvent and depositors lost their money. The regulations put into place then kept US banking safe until 1999 when once again banks could once again speculate. It only took 9 years for the next financial crisis. This time the banking industry held off regulations.

In 2022, banks are holding crypto currencies for customers. Today there are several banks who hold mostly crypto as deposits. The question arises as to how FDIC banks will be dealt with if they become insolvent as well as their cash depositors. Let’s hope no one assumes that the $250,000 FDIC deposit insurance will pay one penny toward crypto losses of depositors.

But what about the cash deposits in insolvent banks caused by crypto?

We are not facing a 1930s banking crisis today. Your FDIC insured accounts will be made whole. It’s the ease of bailouts and money printing today for unproductive debt. If this continues to increase they will devalue your dollars at an accelerating pace. Losses have to be allowed to happen in speculation. Capitalism requires debt defaults and restructuring in failed business structures.

One last reminder. Over half of the SP500 issued debt is one notch above junk today. You know, the same SP500 that is still valued above 1929 levels in terms of most valuation methods even after the froth coming off.

Excerpt from Pam and Russ Marten’s

FTX’s Latest Casualties: Federally Insured Crypto Banks

This metastasizing of the crypto contagion into the federally-insured banking system could also not have happened if members of Congress and federal banking regulators were aware of how federal banking insurance came into being in the first place. Following the Dow Jones Industrial Average losing 89 percent of its value from 1929 to 1932, thousands of banks were insolvent from their reckless involvement with Wall Street speculations.

The 1930s banking crisis came to a head on March 6, 1933, just one day after Franklin D. Roosevelt was inaugurated as President. Following a month-long run on the banks, Roosevelt declared a nationwide banking holiday that closed all banks in the United States. On March 9, 1933, Congress passed the Emergency Banking Act which allowed regulators to evaluate each bank before it was permitted to reopen. Thousands of banks were deemed insolvent and permanently closed.

There was no federal deposit insurance on bank deposits at that time, meaning that depositors lost all of their deposits in many cases or were paid just pennies on the dollar.

“FDIC-insured Silvergate Bank is part of the publicly-traded Silvergate Capital Corp., (ticker SI). Silvergate’s website says this about its hot pursuit of crypto: ‘We began pursuing digital currency customers in 2013 and have been deliberate in our approach to serving this community since then. Today, we have 1,300+ digital currency and fintech customers that are using our platform daily to grow and scale their businesses.’

“Silvergate’s 10-K also states that ‘Deposits from digital currency exchanges represent approximately 58.0% of the Bank’s overall deposits and are held by approximately 94 exchanges.’

Take a look…

FTX’s Latest Casualties: Federally Insured Crypto Banks by the Martens

Categories: Perspectives

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