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The Fiscal Cliff Is A Mole Hill Compared TAG Program Expiry
TMO ^ | 11-12-2012 | Shah Gilani - Money Morning

Posted on 11/12/2012 7:38:32 PM PST by blam

The Fiscal Cliff Is A Mole Hill Compared TAG Program Expiry

Stock-Markets / Credit Crisis 2012
Nov 12, 2012 - 07:24 AM
By: Money Morning

Shah Gilani writes: Everyone is afraid of falling off the "fiscal cliff." But there's another dangerous countdown clock about hit to zero.

And no one is talking about it, even though it will spell even more financial problems for us all.

At midnight on December 31, 2012, the Transaction Account Guarantee (TAG) program will expire.

The TAG program was initiated at the height of the credit crisis when depositors were fleeing banks for fear they would go under.

To quell what was turning into a run on banks, the FDIC upped regular deposit insurance from $100,000 to $250,000 and under the TAG banner initiated unlimited insurance for all non-interest bearing transaction accounts.

It's the second part that's important because that's the piece that will soon come to an end.

When the unlimited insurance expires, corporations, businesses and depositors -- whose soon- to- be- uninsured deposits, which total some $1.4 trillion, are likely to flee smaller banks -- will rush into money market funds and seek the safety of short-term U.S. Treasuries.

This will create serious negative repercussions affecting our economic future.

The Unseen Perils at the Bottom of This Cliff Here's how each of those actions will affect the economy and you personally.

First, the too-big-to-fail (TBTF) banks that created the credit crisis and spawned the Great Recession are much bigger now than they were in 2008, and are about to get even bigger.

Because the failure of any one of America's big five banks would implode the global financial system, they will never be allowed to fail. That makes them a fortress for depositors, regardless of expiring guarantees.

The same isn't true for the smaller banks that will start disappearing.

U.S. corporations are sitting on at least $1.75 trillion in cash. Most of those funds are being held in checking and transaction accounts.

When the unlimited insurance on their deposits expires they will move some of their money elsewhere. But, on account of large payroll and other transaction account services corporations are reliant upon, a lot of that cash will still be parked at the biggest banks.

Cash on deposit at other institutions, greater than what will be insured, which is $250,000 since that higher insurance guarantee was made permanent, will gravitate to the big banks because of their fortress status.

But, it's not just big corporations that will park their money at big banks. Most other businesses that have transaction accounts with balances above the covered $250,000 limit will start moving their accounts to the TBTF banks for the exact same reason.

The problem for the economy is that TBTF banks are going to have to make bigger and bigger loans and orchestrate far-reaching lending schemes that encompass wide swaths of the population (as they did with mortgages) to accommodate the greater economies of scale their huge size demands. That's going to lead to massive concentrations of risk, which the TBTF banks have proven has been, and will be, their downfall.

Personally, for you and me as small consumers of banking services, there will be less competition, and borrowing and transaction costs will rise.

Community banks will start disappearing. Access to credit at the local level will be replaced by impersonal lending factories, which as a result of their economies of scale will not likely be willing to bear the one-off risks of financing small business start-ups and small business' credit needs, at least not without charging significant "risk premiums."

Second, in the Federal Reserve no-interest rate environment, depositors were more comfortable leaving their money in insured accounts than chasing tiny yields on the short-term instruments available to them. With the expiration of unlimited guarantees many corporations and businesses will start looking for some yield on their idle cash.

The reason they will start reaching for yield is that companies, whose treasury managers are counted on to shepherd cash balances, will want to add income to their huge cash hoards and can no longer justify parking cash just to be safe.

Money market funds will be the preferred parking place for a lot of that cash. Even though money market funds don't pay much, they allow quick withdrawals and are considered a good substitute for non-interest bearing checking accounts at banks.

But, there's a problem with money market funds. They aren't guaranteed.

They were back when the Federal government was guarantying all financial parking lots at the time of the crisis, but no more. The Securities and Exchange Commission has been trying to get money market funds to set aside capital reserves, like banks have to do, but to no avail.

What's potentially problematic is that if billions of dollars of cash goes seeking some yield in money market funds, fund managers are going to have to put those new monies to work.

And where do a lot of money market funds go to buy short-term interest bearing instruments so they can offer the best yields to potential billion-dollar customers?

Too often they turn to European banks issuing short-term paper, unfortunately.

If money market funds see huge inflows as a result of cash coming out of uninsured checking accounts, they will start reaching for yield themselves. And we know where that can lead the economy.

Personally, for the rest of us starving for yield, some of those money market funds may start looking more enticing. But, they aren't insured and you may be heading into a trap.

Even More Unintended Consequences Lastly, and this is as convoluted and complicated as it gets, a lot of the cash coming out of bank checking accounts is going to go into short-term Treasury bills and notes.

The unintended consequences of that happening are going to spread through the capital markets and end up causing economic problems on top of the ones we already have.

Right now the Treasury issues about $30 billion of one-month T-Bills every week.

If the majority of the $1.4 trillion sitting in banks in soon to be uninsured accounts heads into these most liquid instruments it would take a year of issuance to satisfy that demand.

Now, don't forget, the Federal Reserve is buying some $45 billion a month of Treasuries and agency paper. And, what about money market funds? If they get flooded with cash, they too will be buying the short- term issues spit out by the Treasury.

Not to complicate things, but what happens if there is actually some deal on the fiscal cliff that results in smaller deficits? Oh, the Treasury wouldn't have to issue as much new debt as it doe s now.

The demand for short-term Treasuries could very conceivably turn their yields negative.

What happens then? As if corporations, pension funds, and people aren't yield starved enough. Will the further implosion of yields and the continuing destruction of fixed income cause everyone to reach further and further out on the risk curve?

It's already happening. Junk bond funds are seeing record inflows as investors are clamoring for yield.

And just like what's going to happen with money market funds, issuers of junk are rushing to soak up the cash being waved at them by the funds trying to place their customers' new money.

Personally, are you going to get caught up in that rat race and end up in another trap?

There's no question that the fiscal cliff is on everyone's mind and certainly front and center in the financial news and press.

But, if we don't look hard and fast at what could happen, and probably will happen when TAG becomes just another legacy of the credit crisis, we may miss the naked truth that the flames of the next great financial conflagration are being fanned starting January 1, 2013.


TOPICS: News/Current Events
KEYWORDS: banks; federalreserve; fiscalcliff; investing; tag; tbtf; toobigtofail; treasuries
File this under, "It's Always Something." (IAS)
1 posted on 11/12/2012 7:38:45 PM PST by blam
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To: blam

I saw a story here from CNN saying that letting most banks go under was probably going to be allowed to happen. I guess fewer banks will be easier to control from DC.


2 posted on 11/12/2012 7:44:46 PM PST by GeronL (http://asspos.blogspot.com)
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To: GeronL

They don’t just want the little guys to fail. The banksters and politicians want the little guys to dissolve so the big banks can buy them for pennies on the dollar. They did this quite a bit in 2008/2009. Most insulting was the Fed paid for it.


3 posted on 11/12/2012 7:47:29 PM PST by volunbeer (We must embrace austerity or austerity will embrace us)
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To: volunbeer

I think we can now count on it being White House policy. They want to fundamentally transform this country, and I think taking control of banks is part of it.

Much easier to control a few large chains than so many small ones.


4 posted on 11/12/2012 7:53:38 PM PST by GeronL (http://asspos.blogspot.com)
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To: blam

Is the hypothesis of “To Big To Fail” designed to cap the wealth growth of successful ideas in society?

If so, is it basically an hypothesis proposed to increase dependency on The State and reduce the independence of the citizens?

Hence, TAG and TBTF appear to be at odds.


5 posted on 11/12/2012 8:07:09 PM PST by Graewoulf ((Traitor John Roberts' Obama"care" violates Sherman Anti-Trust Law, AND the U.S. Constitution.))
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To: GeronL

Microlending and peer to peer lending will remain.


6 posted on 11/12/2012 8:13:51 PM PST by tbw2
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To: blam

Let me see if the fog of confusion can be lifted here. First off, we do not owe $16.5 Trillion. The mafia claim’s against We The People cannot be proven. We have rights under Federal Law. That right is called the Fair Debt Collections Practices Act (FDCPA). This Federal Law guarantees debtors the right to demand proof of debt owed. If the debt cannot be proven, the debt is assumed invalid. We The People demand an itemized statement to Prove The Debt Owed. Under FDCPA the creditors MUST provide The People proof of debt, or it is invalid. THEY CANNOT PROVE IT! Stop falling for it.


7 posted on 11/12/2012 8:15:08 PM PST by NM156 (Prove It)
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To: NM156

Hey, most of the creditors are now domestic. By doing QE, the FED has essentially been buying the vast majority of treasury bonds, not just the ones that are recently issued, but also the ones that are up for sale. That includes China’s. China has been able to get rid of its US Treasury Bonds, and over time most of the outstanding Treasury bonds will be owned by the Fed. What remains is a ridiculous amount of US dollars and high inflation which is already upon us (the CPI # is such a fraud it’s not funny - does not count food, energy, healthcare, and takes liberty of using technological progress to add deflation within the number).


8 posted on 11/12/2012 9:23:58 PM PST by winner3000
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To: NM156

Hey, most of the creditors are now domestic. By doing QE, the FED has essentially been buying the vast majority of treasury bonds, not just the ones that are recently issued, but also the ones that are up for sale. That includes China’s. China has been able to get rid of its US Treasury Bonds, and over time most of the outstanding Treasury bonds will be owned by the Fed. What remains is a ridiculous amount of US dollars and high inflation which is already upon us (the CPI # is such a fraud it’s not funny - does not count food, energy, healthcare, and takes liberty of using technological progress to add deflation within the number).


9 posted on 11/12/2012 9:24:06 PM PST by winner3000
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Comment #10 Removed by Moderator

To: GeronL
I saw a story here from CNN saying that letting most banks go under was probably going to be allowed to happen. I guess fewer banks will be easier to control from DC.

The goal is one bank
One energy company
One news outlet company
One car company
One hospital company
One restaurant company
One clothing company

All under One One party government.

We are all One...

11 posted on 11/12/2012 9:38:50 PM PST by null and void (America - Abducted by Aliens...)
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To: fatasshick
Free-enterprise capitalism and wealth accumulation are gone.

Sharing the wealth, socialism or communism has never existed. Wealth accumulation is gone, except for for the nasty "elite". At least that is the way they would like it. The so called communist have never been anything but selfish thugs. The dumb thing is, what kind of actual pleasure do they get from making others miserable, and strangling the chickens that lay the golden eggs. Empty shells of people who don't even know what true pleasure is, which certainly isn't living for just yourself and causing vast misery to others. They will rot from the inside out.

12 posted on 11/12/2012 9:50:24 PM PST by Bellflower (The LORD is Holy, separated from all sin, perfect, righteous, high and lifted up.)
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To: blam

Any good suggestions anyone about what to do with one’s money?


13 posted on 11/12/2012 10:09:23 PM PST by Bellflower (The LORD is Holy, separated from all sin, perfect, righteous, high and lifted up.)
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To: NM156

Man, you just don’t get it. “They” (The Obama administration) can now do what ever they want to! Forget the rule of law, they do what they want to and make up the rules as they go along. Who will stop them? Congress, the courts? If you believe that, you must have been asleep for the past four years. Constitution, what Constitution?


14 posted on 11/13/2012 12:21:08 AM PST by Shane (When Injustice Becomes Law, RESISTANCE Becomes DUTY.----T.Jefferson)
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To: blam

PING! to deal with when it’s not 3am.


15 posted on 11/13/2012 1:06:50 AM PST by chuckles
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To: NM156
Let me see if the fog of confusion can be lifted here. First off, we do not owe $16.5 Trillion. The mafia claim’s against We The People cannot be proven. We have rights under Federal Law. That right is called the Fair Debt Collections Practices Act (FDCPA). This Federal Law guarantees debtors the right to demand proof of debt owed. If the debt cannot be proven, the debt is assumed invalid. We The People demand an itemized statement to Prove The Debt Owed. Under FDCPA the creditors MUST provide The People proof of debt, or it is invalid. THEY CANNOT PROVE IT! Stop falling for it.

You misunderstand the dynamic.

No one has to prove anything to you.

It simply needs to be proven to an enforcement agency (in this case, the IRS will do), and you will be brought to an understanding.

It's all very tidy.

16 posted on 11/13/2012 5:39:06 AM PST by IncPen (Educating Barack Obama has been the most expensive project in human history)
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To: null and void

Yes. We’ve heard it all before.

Ein Reich
Ein Volk
Ein Fuehrer!

Shalom


17 posted on 11/13/2012 5:55:17 AM PST by esopman (Blessings on Freepers Everywhere and Their Most Intelligent Designer)
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To: NM156

But all the laws that protect We the People are thrown out of the windows already - case in point - obozo gave all the GM money to his beloved unions and left the legitimate shareholders high and dry!

Good luck trying to find the federal judge who will uphold this FDCPA law!


18 posted on 11/13/2012 5:56:34 AM PST by chrisnj
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To: blam; flaglady; mickie
Why doesn't this article tell us if this Act was passed by Congress on a past date....therefore, if it was, why can't it be renewed by Congress before it expires?

The article also doesn't tell us if it's being examined in a congressional committee at this time, if any action is being contemplated, what committee is it assigned to, who's for it and who's against it, are there huge lobbying efforts going on in DC by the big banks...are the small banks organizing to save their businesses.....well, you get my drift.

At least for me, the article left me hanging.....

Leni

19 posted on 11/13/2012 7:06:01 AM PST by MinuteGal
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To: Bellflower
Any good suggestions anyone about what to do with one’s money?

If you have enough, emigrate, while it's still legal.

20 posted on 11/13/2012 8:31:30 AM PST by null and void (America - Abducted by Aliens...)
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To: esopman

YOW! I totally missed that!


21 posted on 11/13/2012 8:37:46 AM PST by null and void (America - Abducted by Aliens...)
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To: NM156

If the mafia decides you owe $16(K, M, B, T) they are inclined to inform you, then opine “that’s a nice home/business/spouse/kid/art/etc you’ve got there, would be a shame if something happened to it” and proceed to make you an offer you can’t refuse.

If their kind can pull this with a Supreme Court Chief Justice, why would you think they can’t with you?


22 posted on 11/13/2012 9:04:06 AM PST by ctdonath2 ($1 meals: http://abuckaplate.blogspot.com)
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To: null and void
If you have enough, emigrate, while it's still legal.

Any suggestions as to where, and why that place in particular? Seems much of the world is either bad politically speaking, or as far as natural disasters are concerned.

23 posted on 11/13/2012 6:36:28 PM PST by Bellflower (The LORD is Holy, separated from all sin, perfect, righteous, high and lifted up.)
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To: Bellflower

That’s the problem. If we fall perhaps nowhere is safe.

You have FReepmail.


24 posted on 11/13/2012 6:45:02 PM PST by null and void (America - Abducted by Aliens...)
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To: null and void

We are all one...The Borg. LOL


25 posted on 11/14/2012 2:45:50 AM PST by wastoute (Government cannot redistribute wealth. Government can only redistribute poverty.)
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