The media frenzy this past couple of weeks over the collapse of two relatively small banks in the U.S. is typical of its unmitigated craving for sensationalism, regardless of the damage it might inflict.

     Two facts are important here: (1) Since 2009, 513 small banks in the U.S. have collapsed, and (2) not a single depositor has lost a cent in bank collapses since the FDIC came into existence in 1933. These are facts from the Federal Deposit Insurance Corporation (FDIC). Admittedly almost 300 of these collapses occurred just after the financial crisis of 2008 but such collapses are by no means uncommon, and may even be symptomatic of the historical design of the U.S. Banking system.

     The collapse of the two banks recently may well be a tragedy but it is certainly not unusual, nor does herald the doom of the world banking industry. Other factors may predict those calamitous outcomes, but the collapse of two small U.S. banks does not: I should add that those other factors can include an irresponsible, sensation-driven, media “storm in a teacup”. It is noteworthy that in the last few days, the media has focused on the problems of Credit Suisse Bank, when those troubles have been around for several years and are not connected to the two banks in California. However, it does make good “copy” if your overriding motivation is “to sell more ……. newspapers”.

     Let’s look at a little history of banking in the U.S. The first banks most people encountered were very small individual banks that were set up in each town when the populations of those towns was very small; we’ve all seen the “Wild West” movies of bank robberies. Those banks were individual and small for very good reasons: Communication over distance was haphazard at best; and most people wanted to keep their money close to them. It made sense then, even if Jesse James could show up and take all your savings. Equally, not all small-town bank managers/presidents were ethical, and there was little to stop them absconding with all the gold, but it was the best design under the circumstances.

     As the population and the number of banks grew across the country, this banking system design of a multitude of small, independent banks was not only jealously guarded by the incumbents, it fitted the American concept of individualism and individual rights.

     When the bigger banks, usually in the bigger cities, started flexing their muscles and trying to create branch banking, the smaller banks got together to stop that incursion on their rights and livelihoods. For a long time, branch banking was illegal in the majority of the U.S. (see the chart at the top of this blog).

     There were so many bank failures from fraud and incompetence that, in 1933, the federal government stepped in and created the FDIC to protect depositors’ money. The system was set up so that the banks that joined FDIC paid fees on transactions and that fund guaranteed depositors’ funds up to a certain limit. The protection of depositors did not come out of the tax base. The FDIC currently insures up to $250,000 per depositor, per institution and per ownership category at member banks. I should also add here that the media is mixing up the concern with protection of depositors money and propping up banks themselves from going under – they are two basically separate issues, although obviously related.

     There are still some small banks that are not members of FDIC, and, in my humble opinion, you would be totally stupid to put your money in them, given the history of small banks. Some of those banks are the ones that serve the marijuana industry, since that industry is still federally illegal. Understandable, perhaps, but one hell of a risk.

     I have not tried to give an in-depth analysis of the banking issues, there have been many books written on this subject. However, a basic understanding of how the U.S. banking system came into being does help us realize that the current media frenzy, and the stock market reaction, really is an irresponsible “storm in a teacup”. However, “storms in teacups” can be just as damaging as real issues if it manages to stir up public opinion.

     I should add here that the Stock market reaction, as always, is driven by the brokers’ system that allows them to make money from every small adjustment in the market: no adjustment, no money. Thus they encourage, and seek out, excuses for the market to go up and down. This latest media frenzy is just one of those excuses.

     I wish I had a solution for controlling the media’s addiction to sensationalism, let alone curbing the reactionary conduct of the stock market. In both cases, they obviously cannot control it themselves. However, any attempt to control it will result in screams of “freedom of the press” from the media and “socialism” from the stock market. Ethical and responsible behaviour rarely seems to come into it in either case.

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