It seems like everyday there's new news with bailouts and banks. Today it was that JPMorgan Chase Bought WaMu for 1.9 Billion. Naturally consumers have a lot of questions and they should have them. I'm not an expert. In fact, I've been distanced from the news as I've been halfway around the world as it was all going down. I'll try to answer a couple of frequently asked questions you may have about the bailout-bank situation today.
Is My Money Safe At My Bank?
I would like to say yes. If you asked me 3-4 months ago, I would have undoubtedly said yes. However, now I actually have a sliver of doubt. It's true that the Federal Deposit Insurance Corporation (FDIC) pledges to insure your money. The problem is that this insurance comes from the US government, and the government itself is largely in debt. As we've seen with the $700 billion dollar bailout, the government is willing to take on more debt. The problem is what happens if a lot of the bigger banks start having problems. How many billions or trillions or extra money does the government have to give people?
I would look for banks that are on solid standing. I am pretty lucky in that much of my liquid money is at Bank of America. They seem to be in much better shape with a market capitalization of 156 billion dollars. A friend of mine who has a Washington Mutual account told me today, he was withdrawing most of the money in the account. Even if the FDIC guarantees it, you don't want to have to wait for them to make you whole. I don't believe they are required to work quickly and while you are waiting for them there may be late fees and the like. I don't mean to scare you, there's probably only a .01% chance of this happening (my off the cuff estimation), but it's still something to consider.
How Do You Feel About the $700 Billion Bailout
Many people have been asking me about how I feel about the 700 billion bailout. There's little to feel good about. It's like choosing between a rock and a hard place. On one hand, I see what the government is doing. If it doesn't support the banks now, the situation will escalate and everyone will be in even worse shape than it is today.
However, I'm a bit of an idealist. I believe that those who have been responsible with their mortgages shouldn't be penalized. This bailout penalizes all tax payers, not just the ones are have been irresponsible. We'll eventually have to pay more taxes (likely after this election) to make America fiscally responsible again. It hurts the American dollar. I felt that personally visiting Australia last week. While the Australian dollar is still less than the American dollar, it didn't buy nearly as much.
One of the worst parts in my opinion is that the bailout doesn't penalize the executives who earned millions and millions while this was going down. It's not like it was some secret and no one knew it was coming. Sites like the The Housing Bubble have been saying it for years. It was simple logic that people getting interest-only ARMs isn't going to last. I was wrong thinking that the people who signed silly things would learn a valuable lesson and that would be the end of it.
What Can We Learn from this Bailout
The fact that the responsible people are going to pay for this is sending the wrong message to America. Why be responsible if your going to end up having to pay anyway. The other message it sends is that you can be irresponsible and the US Government will just bail you out. Doesn't it tempt you to just skip paying taxes for a few years?
What message did it send to the companies? I read somewhere (I think The Economist) that the smaller banks weren't going to attention of the government and hence the bailout money. However, the bigger banks, well the government can't allow those to fail. The reading quoted one anonymous bank executive as saying that the safest plan was to acquire assets quickly to be one of those big banks.
So while I'm quite angry about the whole situation, the only thing I can think of doing about it is continue to do what I've been doing. I will look to to secure my own finances and build diverse income streams. At the same time, I'll try to educate people to avoid being fiscally irresponsible in the first place. Perhaps if we all work together we can prevent this kind of mess from happening in the future. Then again, perhaps I'm too much of an idealist.
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