Category: Bankruptcy


PBS

Is your money safe at the bank? An economist says ‘no’ and withdraws his

BY Terry Burnham  January 30, 2014 at 12:45 PM EST

The Fed policies of Ben Bernanke and Janet Yellen, who begins her term Feb. 1, are making former Harvard economist Terry Burnham withdraw his money from Bank of America. Photo by Davis Turner/Getty Images.
The Fed policies of Ben Bernanke and Janet Yellen, who begins her term Feb. 1, are making former Harvard economist Terry Burnham withdraw his money from Bank of America. Photo by Davis Turner/Getty Images.

Terry Burnham, former Harvard economics professor, author of “Mean Genes” and “Mean Markets and Lizard Brains,” provocative poster on this page and long-time critic of the Federal Reserve, argues that the Fed’s efforts to strengthen America’s banks have perversely weakened them. (See our 2005 segment with Burnham below about how “lizard brains” influence our economic decisions.)

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.

Before I explain, let me disclose that I have been a stopped clock of criticism of the Federal Reserve for half a decade. That’s because I believe that when the Fed intervenes in markets, it has two effects — both negative. First, it decreases overall wealth by distorting markets and causing bad investment decisions. Second, the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated) investors and give to the rich (and politically connected). These effects have been noticed; a Gallup poll taken in the last few days reports that only the richest Americans support the Fed. (See the table.)

Gallup poll

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.

Let me explain: Currently, I receive zero dollars in interest on my $1,000,000. The reason I had the money in Bank of America was to keep it safe. However, the potential cost to keeping my money in Bank of America is that the bank may be unwilling or unable to return my money.

They will not be able to return my money if:

Customers wait in line at the Indymac Bank branch headquarters in Pasadena, Calif., in July 2008. Joshua Lott/Bloomberg News

Customers wait in line at the IndyMac Bank branch headquarters in Pasadena, Calif., in July 2008. Joshua Lott/Bloomberg News

  • Many other depositors like you get in line before me. Banks today promise everyone that they can have their money back instantaneously, but the bank does not actually have enough money to pay everyone at once because they have lent most of it out to other people — 90 percent or more. Thus, banks are always at risk for runs where the depositors at the front of the line get their money back, but the depositors at the back of the line do not. Consider this image from a fully insured U.S. bank, IndyMac in California, just five years ago.
  • Some of the investments of Bank of America go bust. Because Bank of America has loaned out the vast majority of depositors’ money, if even a small percentage of its loans go bust, the firm is at risk for bankruptcy. Leverage, combined with some bad investments, caused the failure of Lehman Brothers in 2008 and would have caused the failure of Bank of America, AIG, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and many more institutions in 2008 had the government not bailed them out.

In recent days, the chances for trouble at Bank of America have become more salient because of woes in the emerging markets, particularly Argentina, Turkey, Russia and China. The emerging market fears caused the Dow Jones Industrial Average to lose more than 500 points over the last week.

Returning to my money now entrusted to Bank of America, market turmoil reminded me that this particular trustee is simply not safe. Or not safe enough, given the fact that safety is the reason I put the money there at all. The market turmoil could threaten “BofA” with bankruptcy today as it did in 2008, and as banks have experienced again and again over time.

If the chance that Bank of America will not return my money is, say, a mere 1 percent, then the expected cost to me is 1 percent of my million, or $10,000. That far exceeds the interest I receive, which, I hardly need remind depositors out there, is a cool $0. Even a 0.1 percent chance of loss has an expected cost to me of $1,000. Bank of America pays me the zero interest rate because the Federal Reserve has set interest rates to zero. Thus my incentive to leave at the first whiff of instability.

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Harvard Economist Expects Bank Runs, Withdraws $1 Million from BofA

AMTV AMTV

Published on Feb 4, 2014

In today’s video, Christopher Greene of AMTV reports on a Harvard economist who expects a Bank Run at Bank of America.
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[LINKS]

Is your money safe at the bank? An economist says ‘no’ and withdraws his
http://www.pbs.org/newshour/making-se…

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http://motherboard.vice.com/blog/why-…

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Published time: January 17, 2014 20:53
Edited time: January 17, 2014 21:32
Freedom Industries on Barlow St on the banks of the Elk River is seen on January 10, 2014 in Charleston, West Virginia.(AFP Photo / Tom Hindman)

Freedom Industries on Barlow St on the banks of the Elk River is seen on January 10, 2014 in Charleston, West Virginia.(AFP Photo / Tom Hindman)

Freedom Industries, the company responsible for the methanol leak that contaminated the water supply in a West Virginia town, has filed for Chapter 11 bankruptcy, according to a new report.

The company’s Board of Directors convened at a special meeting on Friday to file a voluntary petition for bankruptcy protection, according to WVNS-TV in West Virginia. Notes taken at the meeting obtained by the Wall Street Journal indicate that Freedom Industries estimates the company debt is currently at approximately $10 million, although the inevitable clean-up costs, lawsuits, and other fees incurred because of the spill will add to that burden.

Approximately 300,000 people throughout nine counties near Charleston, West Virginia have been under a “do not use” tap water order since January 9. The mandate was put in place because a coal-cleaning chemical, known as 4-methlycyclohexane methanol, seeped into the Elk River.

Known as 'buffalos', water tanks from Northern PA were arrive at a steady pace at West Virginia American Water on January 10, 2014 in Charleston, West Virginia.(AFP Photo / Tom Hindman)

Known as ‘buffalos’, water tanks from Northern PA were arrive at a steady pace at West Virginia American Water on January 10, 2014 in Charleston, West Virginia.(AFP Photo / Tom Hindman)

The bankruptcy document claimed that some sort of object appeared to have pierced an already-leaking storage tank, releasing so much of the chemical into the river that some witnesses said they saw it pooling in ditches along roadsides.

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