Why bank nationalization must happen

We can argue about how we got here, or where we need to be in the future, but some sort of federal government control of banks is going to happen.

Here is why – the premise of our banking system since 1933 has been that there are banks that are “too big to fail“.  These banks are the last defense against total economic collapse. 

The FDIC by itself – does not have enough money to stop the failure of one major “too big to fail” bank.  The premise of the FDIC is that there will always be another bigger bank that can swallow a failed bank, and with some FDIC funds thrown in, the larger bank will take over the accounts and keep doing business as normal.  The only way to rescue a “too big to fail” bank is for the US Treasury to come up with the money.

Here’s the problem.  Corporations keep their working capital in these banks.   They feel safe doing that because everyone has agreed that these banks are Too Big to Fail, and the US Treasury will dive in front of the bus before it would let them fail.

Those corporate funds in Too Big to Fail banks are NOT insured by the FDIC.  Imagine for a moment if the FDIC seized a bank where Wal*mart has its working cash parked.  Wal*Mart is just a theoretical example – but one to worry about because it is so big and considered one of the healthier retailers at the moment.  As of their last SEC filing, Wal*mart had $5.9 billion sitting in “cash” (somewhere).   Wal*Mart’s sales are about $1 Billion per day.  They owe $44 Billion to their suppliers, commercial paper borrowing and unpaid bills (like wages earned, but not paid until pay day).

When you buy something at Wal*mart, that cash (or credit/debit card transaction) is going immediately to a bank somewhere.  A portion of it is set aside to pay the people working there on payday – the rest is going off to pay a supplier who has been waiting 2 or 3 months to get paid or to pay back the commercial paper used to buy the inventory sitting on their shelves.

Imagine if the FDIC seizes the bank and tells Wal*Mart – “sorry, your funds weren’t insured.  File a claim with the FDIC (or bankruptcy court) and you may get some of your money back in a year or so”.   Paychecks could bounce, payments to suppliers will stop, pushing many of those companies into their own cash flow problems and probable bankruptcy.  Nothing would set off a general panic of the population faster than a closed major retailer or seeing empty shelves.

Here is some more background material on Wal*Mart.

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