http://www.motherjones.com/news/feature/2008/07...

Foreclosure Phil

By David Corn
July/August 2008 Issue

“Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown.

Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.”

Read the whole thing and the look at this Youtube:

http://www.youtube.com/watch?v=1mHsuL6FfY4

This is a good explanation of why the FDIC is not going to be enough. Quite frankly, there is little chance that Wamu is going to make it and if Wamu fails it will most likely wipe out almost all the FDIC (a few medium sized failures like have been happening frequently would take care of the rest).

The FDIC is not a government run entity actually. It is capitalized through bank premiums and operates like any insurance company. However, they have a line of credit to the Treasury for 80 (?) billion and will probably need to tap it. Even that might not be enough.

The bigger risk is stated here and that's that our debt may stop being bought. There are increasing signs that many countries are unable to continue to buy our debt or they will be at risk of collapse themselves. This is why it's critical that we start figuring out a large scale strategy instead of having the Fed run around and try to determine things case by case.

If the FDIC fails it'll be disastrous, but in my opinion we have the resources as of now to prevent that from happening. However, as more and more debt gets implicitly backed by the government (because it's being used as collateral for short term loans) it might be harder and harder to support bank accounts.