Has Cash Been King for the Past 10 Years?

If you’re like most investors, you’ve been nearly brainwashed with conventional market “wisdom” that stocks are the best way to grow your portfolio.

You would be crazy not to have your money in the markets, right?

But when markets drop, as we’ve seen in this credit crisis, it’s amazing how quickly the story changes.

Steve Hochberg and Pete Kendall, editors of Elliott Wave International’s Financial Forecast, challenged the notion of stocks’ superiority years before this latest downturn.

Learn how cash has been king – and will remain so – far longer than the latest news headlines may have you believe in this free excerpt from Elliott Wave International’s Credit Crisis Survival Kit.

Elliott Wave International has also made the full Credit Crisis Survival Kit available free for a limited time. In addition to this excerpt, it contains 14 other articles, reports, and videos that reveal how to survive and prosper during the credit crisis.

Cash’s Invisible Reign Made Visible
[excerpted from Elliott Wave Financial Forecast, August 2008]

With respect to cash and its status as the preeminent financial asset, however, we are starting to wonder if investors will ever come around to our point of view, which, as we explained in the March special section, is that there are times when “the phrase ‘focus on the long term’ means “get out and wait.’” As we also pointed out, the last eight years are clearly one of these times, as cash has outperformed all three major stock averages over this period. A July 3 USA Today article shows how this outlook is actually becoming more farsighted as the bear market intensifies:

3-month Treasuries Beat
S&P 500 for past 10 Years

The article says, “Investors who bought stocks for the long run are finding out just how long the long run can be.” But the farther back in time cash’s dominance stretches and the rockier the stock market gets, the farther investors seem to move from ever taking anything off the table. After stating that “there can be times, long times, when stocks won’t beat T-bills,” a professor and popular buy-and-hold advocate is cited as “optimistic that the next 10 years will be better than the past decade.” In March EWFF stated, “Cash will continue to outperform until stocks are no longer fashionable.” There is no sign that such a condition is even close to happening.

It’s somewhat amazing that cash is not capturing anyone’s fancy because a tremendous society-wide thirst for cash is spreading fast. “In a deflation,” the Elliott Wave Financial Forecast has stated, “Rule No. 1 is to unload everything that isn’t nailed down. Rule No. 2 is to sell whatever everything remaining is nailed to.” The banking system is surely deflating, because, echoing Elliott Wave Financial Forecast’s wording again, “Desperate American Banks Are Selling Everything That Isn’t Nailed Down.” SunTrust is selling its stock in Coca-Cola, an asset the bank held for 90 years. Merrill Lynch sold its founding stake in Bloomberg as well as various other subsidiaries.

Meanwhile, “Americans are selling prized possessions online and at flea markets at alarming rates.” Pawnshops and auction sites are booming. At Craigslist.org, the number of for-sale listings soared 70% in eight months. This fits with our review of Craigslist’s prospects when it was getting started in 2005: “This is just the set-up phase. Once the global garage sale really gets rolling, truly astounding volumes of dirt-cheap goods will be available on-line and elsewhere.” The global garage sale is on. The chart of the U.S. savings rate shows that the bull market in cash has come to life.

A 30-year downtrend in savings rates ended at minus 2.3% in August 2005. In May 2008, the savings rate skyrocketed to 5%. This jolt may be somewhat overstated due to the arrival of the government’s stimulus checks, but the burst should be the start of a critical new mindset among consumers. When the government showered the economy with 0 checks, many did something they never would have thought of through most of the bull market: They put the money in the bank, which is exactly what the administration did not want. In fact, federal, state and local governments are desperate for the tax revenue that a little ripple-effect spending would have generated.

According to the National Conference of State Legislatures, states must close a billion shortfall in the current fiscal year. “The problem today is that tax revenue is vanishing,” says a story about the sudden appearance of the worst fiscal crisis in New York since 1975. Even cities like East Hampton, New York, where someone paid 3 million for an oceanfront house last year, are out of money. “Nobody understands how it happened,” says one resident. The pages of this newsletter show otherwise. If we are right, a deflationary decline is depleting and destroying cash flows in novel new ways that no one alive has experienced before.

Definitive Guide to Fundamental News Trading

Currency Market Moves Because Of Fundamental News Releases!

Taking advantage of fundamentals is ALL that separates the pro trader from the wannabes.

And the best part is… You don’t need to be an economists or have a degree in finance to make money with news.

Take two traders, both just beginners, both took the same beginner’s Forex course and learned the basics of trading. Both have similar education and background, and both love trading and their goals are to trade for living for the rest of their lives. Let’s call them “John” and “Henry”.

John spends all his time studying the chart, he experiments with new indicators, new parameters, and constantly trying out new trade ideas. He gets his emotions in line. But he never realizes the fundamental factor to Forex trading… as a matter of fact, he purposely ignores news releases and he never makes the simple correction that will make his trades profitable.

John, later in his life, is the guy you might find frequenting discussion forums, public online trade (chat) rooms, posting some amazing trades, but never ever show you his live account statement… that is, if he even have a live account at this point.

Henry, on the other hand, early on senses that there must be more to Forex trading than just looking at the chart. He may not understand the fundamental news effect to the world economy, but he makes a simple adjustment in the way he looks at trading. Despite the warning from die-hard technical traders to ignore the news, he trusts his intuition and does what’s right… not what people told him.

Henry becomes a professional trader. You never see him frequenting Forex discussion forums, or online trade rooms, because he’s too busy making a fortune in his live account…

This is NOT a bogus comparison. You CANNOT become a successful Forex trader as long as you think and act like 95% of Forex traders, who end up losing.

Forex Guide - An Introduction to Forex Trading

Initially, I’d like to say welcome to this blog! This blog was intended to give facts for traders and investors who want to learn about the forex marketplace and what it can offer.

Getting Started: Self-Traders

Your initial step should be to educate yourself about the marketplace and trading in universal. Read books, get courses, learn strategies, and live out, practice, practice! Mainly brokers offer demo accounts which will allow you to practice trading without risking real cash. You can pace up this procedure by using particular forex simulation software.

For a few behind facts on the foreign exchange marketplace, visit the Forex Marketplace Snapshot to learn concerning the size of the marketplace, the majority widely traded currency pairs and where mainly of the trading takes place. For more thorough facts about the terms used in the forex marketplaces as well as a few general and exact forex trading terms visit Forex Basics.

Trading Tips

1^st. Study or expand a profitable trading strategy. Visit the ebooks, courses, books and physical forex systems pages for a few ideas.

2^nd. never over-leverage your account! This may be one of the mainly ordinary reasons besides not having a profitable trading plan that many new sell traders blow out their accounts. A high-quality rule of thumb is to not leverage your account more than 10 times its value. What that means is that you don’t unlock positions worth more than 10 times the value of your account. For example, you wouldn’t open trades worth more than ,000 if you only had ,000 in your account. For a more full explanation on influence, click here. Lastly, don’t spend or risk cash that you can’t pay for to lose.

Selecting a Broker

Astonishingly, this may be one of the mainly important decisions you make outside of developing or learning a gainful strategy and not over-leveraging your account. You require to find a moral broker who will not play tricks with you with their pricing and prevent you out of trades in order to build up their wallet! This is characteristic behavior of marketplace makers who have a financial incentive for you to lose when they are on the opposite side of your trade. Not all marketplace makers act in this way, so it is a good idea to do your research on all brokers and marketplace makers before placing your money with them. You can open an account with one of F4forex’s preferred forex brokers or make sure the Forex Broker Ratings part of this blog to help you make the correct decision when it comes to choosing a agent.

Handled & Semi-Managed Savings

Some marketplace participants may wish not to take the self-trading way but instead opt for a handled account, automated trading system or auto-trading supplier. Once more, don’t over-leverage your account when using an automatic scheme or autotrading provider. Ask your managed account supplier how much leverage they use when they place their trades so that when a drawdown occurs it will be limited to a reasonable level. It is also a great idea to diversify your investments amongst several providers, systems and/or trading styles. When one is up, the other may be down and vice versa. And, though it has been said many times before, don’t invest or risk money that you can’t afford to lose!

With those ideas in brain, this blog has been agreed in a way to take you throughout many aspects of the sell mark forex marketplace so you can study at your own speed and call the parts that notice you typically.

Blog Structure

This blog is classified into 5 main sections:

• Forex Learning - This section supplies a background to the forex marketplace to assist you learn, discover and become informed about a variety of aspects of the foreign swap marketplace.

• Forex Products - This part provides more in depth forex teaching and specialty asset products, including forex books, ebooks, courses, physical systems, automated systems and the like.

• Forex Services - This part provides services for those by now in the marketplace looking to assist them in their trading and/or invest in the forex marketplace.

• Forex Brokers - This division covers how to select a broker, broker listings, comparisons, ratings and reviews.

• Forex Resources - This division provides a broad range of gratis resources.

Why Your FDIC-Backed Bank Could Fail

With big bank bailouts dominating the news, there’s no better time to get the truth about bank safety.

This informative article has been excerpted from Bob Prechter’s New York Times bestseller Conquer the Crash. Unlike recent news articles that are responding to the banking crisis, it was published in 2002 before anyone was even talking about bank safety. However, you may find the information even more valuable today than ever before.

For even more information on bank safety, visit Elliott Wave International to download the free 10-page report. It contains details on how you can protect your money from the current financial crisis, updated for 2008.

Risks in Banking

Between 1929 and 1933, 9000 banks in the United States closed their doors. President Roosevelt shut down all banks for a short time after his inauguration. In December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had. Sometimes such restrictions happen naturally, when banks fail; sometimes they are imposed. Sometimes the restrictions are temporary; sometimes they remain for a long time.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money.

If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.

Because U.S. banks are no longer required to hold any of their deposits in reserve, many banks keep on hand just the bare minimum amount of cash needed for everyday transactions. Others keep a bit more. According to the latest Fed figures, the net loan-to-deposit ratio at U.S. commercial banks is 90 percent. This figure omits loans considered “securities” such as corporate, municipal and mortgage-backed bonds, which from my point of view are just as dangerous as everyday bank loans. The true loan-to-deposit ratio, then, is 125 percent and rising. Banks are not just lent to the hilt; they’re past it.

Some bank loans, at least in the current benign environment, could be liquidated quickly, but in a fearful market, liquidity even on these so-called “securities” will dry up. If just a few more depositors than normal were to withdraw money, banks would have to sell some of these assets, depressing prices and depleting the value of the securities remaining in their portfolios. If enough depositors were to attempt simultaneous withdrawals, banks would have to refuse. Banks with the lowest liquidity ratios will be particularly susceptible to runs in a depression. They may not be technically broke, but you still couldn’t get your money, at least until the banks’ loans were paid off.

You would think that banks would learn to behave differently with centuries of history to guide them, but for the most part, they don’t. The pressure to show good earnings to stockholders and to offer competitive interest rates to depositors induces them to make risky loans. The Federal Reserve’s monopoly powers have allowed U.S. banks to lend aggressively, so far without repercussion. For bankers to educate depositors about safety would be to disturb their main source of profits. The U.S. government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to 0,000, which seems to make safety a moot point. Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise.

This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is.

---

For more information on bank safety, including how to choose a safe bank during the current financial crisis, download EWI’s free 10-page report

I’m riding a losing trade, What should I do?

by Corbin Layton and Rob Booker

Have you ever said to yourself, “Well, going long (or short) the EUR/USD looked good at the time I took the trade!“

Perhaps you’ve had an experience where for the past several weeks, you’ve been haplessly watching a poor little EUR/USD trade spiral out of control to the point where you can hardly contain pulling your hair out by the roots. You’ve witnessed this innocent little trade morph into a horrifying beast which you are now referring to as the “drawdown monster.”

We’ve all been there, haven’t we? Paralyzed by fear or — if you’re anything like me sometimes — just stubbornly unwilling to admit defeat and close the darn trade. It’s a difficult thing to confess when we’re wrong, but at what point do we say enough is enough?

So, the question is simply this—what should my next move be? How long should I hang onto this trade that just seems to be going from bad to worse to absolute train wreck? Should I cut my losses and consider it a painful lesson learned or do I hang on to this bad boy and hope it comes back? Stranger things have happened, right?

Well, let’s put something into perspective.

Losing Money

Let’s say I have ,000 in my margin account and I lose ,000. My drawdown in this case would be 50 percent. Now, what percentage of that ,000 would I have to make in order to get back my original ,000? 50 percent, right? Wrong! I would have to make back 100 percent of my ,000 to get back to my original ,000!

The point of this harrowing example is this—it’s very easy to lose money and a whole lot harder to get it back.

“But Rob, I would never lose 50% of my account in one trade.” For your sake, I certainly hope not. But for the sake of argument, let’s just say you do. How on earth do you get yourself out of this pickle?

Perhaps this question is best answered through the sad and forlorn tale of my good friend and currency trader, Shasty McButterknuckle, who is actually the alter-ego personality of a member of the marketing department at IBFX.

Shasty has a heart as good as his intentions, but he perpetuates three tendencies that seem to get him in trouble and constantly keep him in the red:

Tendency #1—A little thing called pride!

Shasty has a penchant for hanging on to trades for nothing more than his heightened sense of ego. He is so committed to proving that his original decision was right that he’s willing to stubbornly cling to it until the very end. And interestingly enough, the more pips he loses, the more convinced he is that his original premise was justifiable. Shasty holds on to losers in an effort to prove that he was right—both in his own eyes and in the eyes of others.

Solution: There should ALWAYS be a reason for your trading moves. A decision based on ego will inevitably come back to haunt you. A trader who fails to maintain a strict trading plan won’t know where to exit a trade or how much money he could make or lose. This “fly by the seat of your pants” style trading more often than not leads to disappointment and frustration.

Tendency #2—Adding to losing positions

Shasty sometimes not only holds on to a losing trade but also actually adds positions to it, rationalizing that his targets will be hit when the currency changes direction. Of course, this method is super-terrific if the currency does, indeed, change direction, but if it doesn’t and he maintains that losing position, it simply hastens the painful demise of that poor little trade.

Solution: Adding to losing positions in order to “save yourself” is an entirely different ballgame than doing so because it’s a valid part of your trading strategy. If a trader is adding positions for the right reason, the key to remaining competitive lies squarely within his psychological ability to ride out a big drawdown—a feat that should never be taken lightly—and then allowing the trade to reach its maximum potential.

Tendency #3—Loyalty

Perhaps Shasty’s biggest downfall is his undying love and commitment to a particular currency pair. In this case, his strength is also his weakness. His sense of loyalty holds him back from making sound, educated trading decisions.

Solution: Fundamentally speaking, your feelings about a given currency pair don’t mean squat. The key to remaining competitive in Forex trading is allowing the market to tell you about the currency and then pouncing, not vice versa. Give more weight to what is happening in the market than to your attachment to the pair.

So, we find ourselves back at the beginning—Riding a losing trade and wondering what to do next.

A dear friend once told me, “Wise people learn from their own mistakes, but super wise people learn from the mistakes of others.” So what can we learn here? Firstly, don’t trade like Shasty! Be ye not so foolish. Learn from his mistakes and your margin account will thank you.

Secondly, take heed to these sound trading principles:

• Grasp a bigger picture perspective on the market. Before you begin trading for the day, have a look at the weekly and/or monthly chart. They can often provide you a broader perspective of a particular currency pair.
• Accept responsibility for your own actions. When you have a losing trade, don’t look for others to blame. You made the decision to place the trade. You control your trading destiny. You and you alone.
• Maintain a strict adherence to sound money management. Buying into the “get rich quick” scheme of Forex trading has left countless numbers of traders with dwindled margin accounts. Manage your assets well and you will be a much happier—and much more competitive—currency trader.

We’re experiencing a once-in-a-decade event in the Forex market, my friends, and it isn’t going away anytime soon. An extraordinary confluence of events has thrown nearly every financial market into chaos and, sadly, Forex was not immune. I’m reminded of a rather macabre but ever so appropriate phrase I once heard that went a little something like this—adapt or die.

Drawdown is a painful reality in Forex trading and despite how much you punch, kick, and fight, it will undoubtedly happen to you at some point. It’s up to you to decide how you’ll handle it. It can make you angry and vengeful or it can make you wiser and more disciplined. I can’t speak for you but I most certainly prefer the latter.

As fellow currency traders, we always welcome your thoughts, comments and questions. We’re always here to help.

Happy trading!

Corbin (from the U.S.)
Rob (from Dubai, UAE)

ZuluTrade Top Forex Signal Providers For Week of Nov 7 2008

Hey everyone. Here are the top forex trading signal providers for this week ending Friday November 07, 2008. My account is up 181 pips. It may not be a lot for some, but considering the huge volatility that manifested itself this week I am happy with anything that is not a loss. Here are the top performers:

Top Signal Providers for this week:

Definitive Guide to Fundamental News Trading

Currency Market Moves Because Of Fundamental News Releases!

Taking advantage of fundamentals is ALL that separates the pro trader from the wannabes.

And the best part is… You don’t need to be an economists or have a degree in finance to make money with news.

Take two traders, both just beginners, both took the same beginner’s Forex course and learned the basics of trading. Both have similar education and background, and both love trading and their goals are to trade for living for the rest of their lives. Let’s call them “John” and “Henry”.

John spends all his time studying the chart, he experiments with new indicators, new parameters, and constantly trying out new trade ideas. He gets his emotions in line. But he never realizes the fundamental factor to Forex trading… as a matter of fact, he purposely ignores news releases and he never makes the simple correction that will make his trades profitable.

John, later in his life, is the guy you might find frequenting discussion forums, public online trade (chat) rooms, posting some amazing trades, but never ever show you his live account statement… that is, if he even have a live account at this point.

Henry, on the other hand, early on senses that there must be more to Forex trading than just looking at the chart. He may not understand the fundamental news effect to the world economy, but he makes a simple adjustment in the way he looks at trading. Despite the warning from die-hard technical traders to ignore the news, he trusts his intuition and does what’s right… not what people told him.

Henry becomes a professional trader. You never see him frequenting Forex discussion forums, or online trade rooms, because he’s too busy making a fortune in his live account…

This is NOT a bogus comparison. You CANNOT become a successful Forex trader as long as you think and act like 95% of Forex traders, who end up losing.

Forex Guide - An Introduction to Forex Trading

Initially, I’d like to say welcome to this blog! This blog was intended to give facts for traders and investors who want to learn about the forex marketplace and what it can offer.

Getting Started: Self-Traders

Your initial step should be to educate yourself about the marketplace and trading in universal. Read books, get courses, learn strategies, and live out, practice, practice! Mainly brokers offer demo accounts which will allow you to practice trading without risking real cash. You can pace up this procedure by using particular forex simulation software.

For a few behind facts on the foreign exchange marketplace, visit the Forex Marketplace Snapshot to learn concerning the size of the marketplace, the majority widely traded currency pairs and where mainly of the trading takes place. For more thorough facts about the terms used in the forex marketplaces as well as a few general and exact forex trading terms visit Forex Basics.

Trading Tips

1^st. Study or expand a profitable trading strategy. Visit the ebooks, courses, books and physical forex systems pages for a few ideas.

2^nd. never over-leverage your account! This may be one of the mainly ordinary reasons besides not having a profitable trading plan that many new sell traders blow out their accounts. A high-quality rule of thumb is to not leverage your account more than 10 times its value. What that means is that you don’t unlock positions worth more than 10 times the value of your account. For example, you wouldn’t open trades worth more than ,000 if you only had ,000 in your account. For a more full explanation on influence, click here. Lastly, don’t spend or risk cash that you can’t pay for to lose.

Selecting a Broker

Astonishingly, this may be one of the mainly important decisions you make outside of developing or learning a gainful strategy and not over-leveraging your account. You require to find a moral broker who will not play tricks with you with their pricing and prevent you out of trades in order to build up their wallet! This is characteristic behavior of marketplace makers who have a financial incentive for you to lose when they are on the opposite side of your trade. Not all marketplace makers act in this way, so it is a good idea to do your research on all brokers and marketplace makers before placing your money with them. You can open an account with one of F4forex’s preferred forex brokers or make sure the Forex Broker Ratings part of this blog to help you make the correct decision when it comes to choosing a agent.

Handled & Semi-Managed Savings

Some marketplace participants may wish not to take the self-trading way but instead opt for a handled account, automated trading system or auto-trading supplier. Once more, don’t over-leverage your account when using an automatic scheme or autotrading provider. Ask your managed account supplier how much leverage they use when they place their trades so that when a drawdown occurs it will be limited to a reasonable level. It is also a great idea to diversify your investments amongst several providers, systems and/or trading styles. When one is up, the other may be down and vice versa. And, though it has been said many times before, don’t invest or risk money that you can’t afford to lose!

With those ideas in brain, this blog has been agreed in a way to take you throughout many aspects of the sell mark forex marketplace so you can study at your own speed and call the parts that notice you typically.

Blog Structure

This blog is classified into 5 main sections:

• Forex Learning - This section supplies a background to the forex marketplace to assist you learn, discover and become informed about a variety of aspects of the foreign swap marketplace.

• Forex Products - This part provides more in depth forex teaching and specialty asset products, including forex books, ebooks, courses, physical systems, automated systems and the like.

• Forex Services - This part provides services for those by now in the marketplace looking to assist them in their trading and/or invest in the forex marketplace.

• Forex Brokers - This division covers how to select a broker, broker listings, comparisons, ratings and reviews.

• Forex Resources - This division provides a broad range of gratis resources.

Why Your FDIC-Backed Bank Could Fail

With big bank bailouts dominating the news, there’s no better time to get the truth about bank safety.

This informative article has been excerpted from Bob Prechter’s New York Times bestseller Conquer the Crash. Unlike recent news articles that are responding to the banking crisis, it was published in 2002 before anyone was even talking about bank safety. However, you may find the information even more valuable today than ever before.

For even more information on bank safety, visit Elliott Wave International to download the free 10-page report. It contains details on how you can protect your money from the current financial crisis, updated for 2008.

Risks in Banking

Between 1929 and 1933, 9000 banks in the United States closed their doors. President Roosevelt shut down all banks for a short time after his inauguration. In December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had. Sometimes such restrictions happen naturally, when banks fail; sometimes they are imposed. Sometimes the restrictions are temporary; sometimes they remain for a long time.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money.

If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.

Because U.S. banks are no longer required to hold any of their deposits in reserve, many banks keep on hand just the bare minimum amount of cash needed for everyday transactions. Others keep a bit more. According to the latest Fed figures, the net loan-to-deposit ratio at U.S. commercial banks is 90 percent. This figure omits loans considered “securities” such as corporate, municipal and mortgage-backed bonds, which from my point of view are just as dangerous as everyday bank loans. The true loan-to-deposit ratio, then, is 125 percent and rising. Banks are not just lent to the hilt; they’re past it.

Some bank loans, at least in the current benign environment, could be liquidated quickly, but in a fearful market, liquidity even on these so-called “securities” will dry up. If just a few more depositors than normal were to withdraw money, banks would have to sell some of these assets, depressing prices and depleting the value of the securities remaining in their portfolios. If enough depositors were to attempt simultaneous withdrawals, banks would have to refuse. Banks with the lowest liquidity ratios will be particularly susceptible to runs in a depression. They may not be technically broke, but you still couldn’t get your money, at least until the banks’ loans were paid off.

You would think that banks would learn to behave differently with centuries of history to guide them, but for the most part, they don’t. The pressure to show good earnings to stockholders and to offer competitive interest rates to depositors induces them to make risky loans. The Federal Reserve’s monopoly powers have allowed U.S. banks to lend aggressively, so far without repercussion. For bankers to educate depositors about safety would be to disturb their main source of profits. The U.S. government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to 0,000, which seems to make safety a moot point. Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise.

This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is.

---

For more information on bank safety, including how to choose a safe bank during the current financial crisis, download EWI’s free 10-page report