…

The people who will be able to continue functioning most “normally” as things tighten down will be those who have good credit records. (also — as I understand it, couples can use the higher rating of the two). People who aren't sure should request their credit records (you can do that for free once a year), and examine them for errors or very old “dings”… and get them removed.

I haven't used this particular site, but it includes the 3 agencies lenders rely on for their decisions.

It really depends what your general outlook is. If you think that we can right the asset ship I'd say that it's not a good idea, but I think the most important things are to protect people's cash savings and the US dollar and from that perspective that's why I think it's OK. I am more concerned with people losing physical savings than protecting asset values at this point.

Interestingly — Mikkel's response to the FDIC question seemed to suggest that it's an okay idea, but he then went on to describe quite a number of reasons it isn't.

“Increasing the limit will also make bad banks take more risks because people are less likely to move their money if it's insured, so in a way it may help contribute to bank failures over the long haul. Countrywide, Wamu, etc have had insane CD yields and were doing even worse and worse transactions even as they were going under because their CD yields attracted a ton of FDIC insured deposits.”

This is the argument against raising the FDIC limit in a nutshell. In the short term it tamps down panic and encourages people to leave their money in the banks. Longer term, it lulls people to sleep about any risk to their money from bad banking and encourages more risky behavior on the part of the banks.

As for the FDIC's funding, FWIW, my understanding is that Congress (THEM again!) ordered the FDIC to stop collecting premiums from banks when the FDIC's fund reached ~$50 billion. Because, *of course* that was enough money to safeguard the system, and why should banks keep paying for their insurance when the insurance company already had *enough* funds?

Idiots. They all need to be thrown out of office. Now.

See the FDIC is actually privately financed through insurance premiums paid by the banks. The limit is to help the fund figure out how much potential liability it has. Also there is the effect that everyone wants which is that encourages people to put money in money market funds and other investments that can then be used to do more than just give loans, and opened up the bottle for all this spiffy debt creation. (For instance a lot of money market funds are invested in corporate bonds and such).

So by increasing FDIC limits it is going to be an implicit government backstop against failure because the banks can afford to pay more on their insurance. I think this is actually OK from both an economic and confidence standpoint.

Remember that most of “money” in the system is just leveraged out of real money. So the government backstopping assets and trying to get them to rise means expanding the monetary base immensely and leading to inflation. However, if banks are failing and have tons of debt destruction, and the government supports the bank accounts (even through direct printing) then it is my understanding that overall this would lead to deflation and not threaten our currency. I *may* be wrong because of some caveat I'm over looking.

So actually increasing the FDIC limits is more likely to make things worse from a deflationary standpoint because everyone will be more likely to take their money out of all the private investments and put them in a bank. The idea I guess is that if the banks have more capital they can work through their problems better, but the asset values will fall from the flight to safety, counteracting their increase in capital.

However it should protect individuals better which I think is important as long as the government is aware of the consequences and doesn't try to fight them (haha i know I should be a standup).

Increasing the limit will also make bad banks take more risks because people are less likely to move their money if it's insured, so in a way it may help contribute to bank failures over the long haul. Countrywide, Wamu, etc have had insane CD yields and were doing even worse and worse transactions even as they were going under because their CD yields attracted a ton of FDIC insured deposits.

FWIW, Dear Husband agrees with you completely. Here's hoping you're both right, since we didn't reposition nearly enough.

:>

Meanwhile, on a slightly unrelated note. Both McCain and Obama are now banging the drum for increasing the FDIC limits. My reaction isn't particular good, since it sends a much different signal to my ears (one that isn't at all reassuring). What's your opinion?

The CW is to look at the market since 1946 (because we all know that the 30s were bad) and then refer to the mid 60s through 70s as another bad period and it shows that you should always hold because there are fast recoveries. Well this is a great myth, and this pattern is seen in all sorts of stuff so it's not really a fluke.

In secular bull markets (that admittedly can run a really long time) it is best for long term investors to sit and wait because each cyclical bear market soon is surpassed by the next cyclical bull. But in secular bear markets that can last just as long there is a consolidation pattern of the cyclical cycles and it makes sense to try to time it or sit out completely. Based on historical trends and our current imbalances I think it'll be at least 2014-2015 before the next secular bull begins, perhaps even a few years longer. (I'm not saying that there won't be another cyclical bull that brings us back to the peaks we've seen before failing…that's a good possibility).

I've seen so many ideas “proven” by people running them on 1980-2007 that are now being overturn. The sad thing is that a big bulk of people's retirement plans are predicated on the idea that over any given ten year period, there is an annualized gain of 10%, which is just flat out wrong as you can see from the chart. (Also that's the Dow chart, the S&P is even more dramatic.) I feel bad for anyone that was/is planning on using the stock market to support them in retirement if they are the smack in the middle of a secular bear.

My parents are a highlight of the worst timing, where they had the last 8 years where when they had the most focus on building up retirement funds it hasn't been good and then they are most likely looking at another 8 years once they are retired of subpar performance. Fortunately they aren't in too bad of shape, although there is a lot of pressure on me to get consistent 10-15% annualized gains to make sure their plans don't crumble, which actually isn't too difficult for smaller traders that can play both directions.

Me too!!!!! Very little comfort in being right, though, in this particular situation.

Mikkel: I don't know that I agree with you about the market, near term (though I agree totally that it's over-valued generally). In spite of taking losses yesterday in companies I don't think are in danger, I'm fulling expecting a contraction across the board. Partly in over-reaction, and partly as society makes the necessary adjustments and dollar velocity slows.