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The zero interest rate policy (ZIRP) will kill the banks. Falling interest rates help banks by increasing the value of their bond and loan portfolios. This is the well understood inverse relationship between discount rate and present value of a future sum. But you see keeping interest rates at zero does virtually nothing for the banks as rates cannot fall further. There is a short window where ZIRP is a positive but an "extended period" (in Fedspeak) is just slow death for the banks. During that short period, the banks are still collecting on portfolios constructed when rates were higher but as those higher-yielding assets mature, there is nothing comparable to replace them. We hear constantly how banks can just borrow at zero and invest in Treasuries - pocketing the difference. That would be fine if yields on Treasury debt were not low and falling along with everything else. The other problem is that this simplistic formula assumes that banks' operating expenses are negl...

Every dollar-denominated loan can be viewed functionally as a partial naked short position in FRNs (Federal Reserve Notes, 1.e. cash). The extent of the naked short is the inverse of the reserve ratio, so at 10% reserve, the position is written as 90% naked short. The entry is created where the bank shorts notional dollars into existence where none existed before. The Fed is a mechanism for supporting those naked shorts against margin calls that would otherwise happen in the real world - that's what a bank run really is, a margin call by lenders (depositors). The continued existence of this naked shorting depends utterly on the willingness of the lenders to accept repayment in virtual instead of real dollars. Wire transfers, checks and book entries are all dollar substitutes, not actual dollars. An entire massive infrastructure has been erected to push people towards the conclusion that these are actually identical to FRNs . Banks will freely exchange your book entry with th...

Well friends it's time to talk about bank failures and wealth preservation. We have talked about insolvent banks on multiple occasions before but the threat of large banks failing is now imminent. Countrywide was saved from such a fate by Bank of America. Now IndyMac is right on the edge. They're not officially dead yet - only mostly dead but there's no Miracle Max in sight. Their recent letter to stakeholders reads like a death certificate: regulators involved prohibited from getting brokered deposits can't sell stock (no buyers) asset sales would deplete capital (tacit admission of mis-valuation) ===> must stop making loans The FDIC has been bulking up for months now, anticipating a wave of bank failures. So far it's been a few small banks but now it's the big boy's turn. So how secure are bank deposits and and how much can the insurance fund really cover? For now, it looks like the answers are pretty safe (as long as you're under the $100,000 lim...