Why Banks Fail and why the Taxpayer is left holding the IOU

The executive summary of the problem of bank failure can be summed up in a very few words: greed and compliance of politicians

A little Background:
The history of banking goes back to ancient Greece, Egypt, and Rome. Throughout history, banks have failed, pretty much for the same reason. The greed and mismanagement of the owners and the support of politicians (through the creation of central banks).

Two types of Accounts:
There have been successful banks that have lasted for more than 150 years when they have followed basic principles of bank management. The two types of accounts can be described in none Latin terms as deposit accounts and loan accounts.

Deposit accounts can best be described in today's language as the equivalent of a safe deposit box. The owner or depositor retains ownership of the funds and has immediate and full access on demand (during normal business hours). In history these accounts actual cost the depositor money akin to safe deposit box rental today. There was no interest paid on these funds.

The bank held these funds under what is known as 100% reserve. That means if ALL the customers came and ask for their money, all transactions would be covered by funds in the bank's vault.

Loan accounts are similar certificates of deposit. You give the bank use of your money for a fixed period of time and they agree to pay you a set interest rate. This is how banks make their money. They may pay you 4% interest over the year, but they may actually make 6%. You're typically happy with your cut, and the bank takes their cut. There is usually some risk of losing principle with these type of accounts, so buyer beware.

Today's Banks:
Next time you go to your bank, credit union, or savings and loan, ask the manager on duty what their reserve ratio is. Do not be surprised if they tell you a single digit number. This is referred to as the "fractional reserve system". The history of successful banks is built on those banks that have practiced the 100% reserve system and that have kept the two types of accounts separate, not only on paper, but in a physical sense as well.

Why the Taxpayer Gets left holding the bag:

Can you say: FDIC Federal Deposit Insurance Corporation. This is the arm of the federal government that bailouts banks (savings and loans, credit unions, etc...) with your money when the management team losses their hind end with the investments they made with your deposits. The leadership of the failed bank gets to keep their private jets, country club memberships, and million dollar houses, and you the taxpayer gets the bill.

This cozy relationship has come about over the centuries due the that simple fact that politicians have benefited from the banks taking their deposit account funds and loaning them to local government for projects and who knows what else. The political contributions of the banking and financial industries are quite a staggering sum. They tend to donate to both parties, to cover their bases.

What should be done:

Eliminate the FDIC program and tell banks that the leadership is responsible for any and all deposits. Suggest to all depositors, to understand the two types of accounts (deposit and loan) and the costs and potential risks of each. In addition, end the Federal Reserve system of loaning banks money to cover their loses. Hold the officers of the bank personally responsible. In Venice, Italy circa 1450, failed bank officials were hung.

Google the FDIC and add up their bailouts over the last 30 years, warning, it's a big number. It's time to bring some sanity to Washington and stop the inter-generational theft.

A successful representative republican (as outlined in the Constitution) requires an informed citizenry.