Why IndyMac's Failure Matters to You (Even if You Don't Have Money There)

07.24.08 | Money Management | 2 Comments | by Fred Siegmund

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All savers should pay attention to what happens with the recent IndyMac Bancorp default.

IndyMac Bancorp is different than other recent defaults because IndyMac is a bank that offers checking accounts, which are money by definition of the Federal Reserve Bank and by common understanding of depositors and everyone else. Bear-Stearns, remember, was not a bank.

It is good that accounts are insured by the Federal Deposit Insurance Corporation up to $100,000, but that is not the only protection for depositors. Failure to guarantee every dollar of every checking account has potentially severe and dangerous consequences for savers and the economy.

Failure to pay on a bank default introduces risk for those who are holding money as deposits. Every business and individual needs somewhere to hold money that is risk free.

If businesses and individuals realize there is risk to holding checking accounts, they will change their financial habits in unpredictable and unmanageable ways that will make it much harder to manage the U.S. economy.

Businesses can hold accounts abroad. Individuals can horde cash and so on.

As a bank offering checking accounts for depositors, IndyMac only had to hold around fifteen cents on each dollar of deposits as reserves to pay on their customer's checks. In the normal course of business that is adequate because those writing checks will about equal those making deposits.

In the normal course of business, their borrowers will be paying monthly principal and interest to further assure they have reserves to pay on their checking account customers.

There in lies the problem. The banks were careless and made many risky and foolish mortgage loans. The loans were made with the other eighty five cents on the dollar of depositors' money; loans made without the knowledge or approval of depositors.

Notice how different that is from someone who buys a stock or a bond by their own decision and using their own money.

Our Federal Reserve Bank and other bank regulators have the full ability and authority to regulate and supervise loan practices and review their financial condition. They failed to do so.

Our Federal Reserve Bank has full ability and authority to protect every dollar of the IndyMac accounts in addition to deposit insurance. They can provide the reserves in case of default. They determine and manage total bank reserves. Now they must do so. Pay close attention here.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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