Page 167 - Ready Set Retire

Ready. Set. Retire!

enforces very strict controls and safety measures on how
money under its oversight is managed.

Why is FDIC Insurance necessary?

Banks can have up to a nine-to-one ratio of liabilities to capital.
Here’s what that means. If you deposit $1,000 in a bank, the
bank can go to the Federal Reserve and borrow up to $9,000
against that $1,000. Then, the bank can lend that money out to
personal loans, credit cards, run businesses, and the other
commercial lending activities a bank engages in.

They get in trouble, however, when they get greedy like what
happened during the years prior to 2008 when they lent to
financial markets and invested in derivatives and many other
things commercial banks were never supposed to do. Before
we knew it, they were swimming in mountains of debt they
couldn’t pay back and the whole system came down.

Obviously, banks can easily become over-leveraged, and
sometimes in very risky investments, like those that led to the
recent financial and banking crisis of 2008, and the Great
Depression of the 1930s. FDIC insurance is critical for safety
and protecting depositors from a financial meltdown like
happened in the 30s. However, as we saw in 2008, even these
measures were not enough to prevent another catastrophe.

Why the Legal Reserve System is Different

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