Investment co-op with 100% reserve could save Chattanooga in bank crisis

Stiffed by the IMF, their national government and their banks, depositors in Cyprus are living out a lesson Chattanoogans might want to skip by creating a lococentric capital co-op that takes deposits as well as investment capital for local investing and lending. (Photo from Al Jazeera video)

By David Tulis

The seizure of bank depositors’ accounts in Cyprus this week is a sobering reminder of the nature of financial systems that have rejected the rules of honest weights and measures that holy scriptures prescribe.

The prohibition of elastic currency systems in which the bills are printed or generated by fiat is intended to allow for a people to prosper and for a free market to protect the interests of all players. For His glory and as a reflection of His justice, God plainly requires that scales be fixed, that coinage be honest, that representations of value be true and legally binding and that inflation be a crime.

Cyprus, a financial and banking center of Europe, drew depositors as did Iceland, with generous rates of interest. The European Union is demanding that depositors at Cyprus’ two biggest banks, Bank of Cyprus and Laki Bank, accept seizure of most of their funds past the first 100,000 euros (F$128,000). Depositors to these banks, in effect their lenders, are being told they will lose up to 60 percent of their euros above that level.

The government in Nicosia is allowing the funds to be seized to help the government and banking sector cough up 5.8 billion euros so these parties can borrow 10 billion euros (nearly F$13 billion) from the eurozone and the International Monetary Fund, who have practically ordered the seizure.

Losses of at least 37.5 percent are being imposed on “big” depositors, with another 23 percent loss possible if officials believe it’s important. A rush to liquidity and safety (aka a bank run) is being prevented by limits on cash withdrawals from any account of 300 euros a day.

America’s 1991 foretaste

During the 2008 meltdown American banks collapsed regularly in the three years that followed. But the Federal Deposit Insurance Corp., always on Friday, would step in, take over the bank and sell it to a rival or a neighboring lender. Depositors were not affected by these seizures and rebranding of lenders whose silly portfolios caught up with them.

But the U.S. has not seen a collapse such as it did in Rhode Island in 1991, when the insolvency of a corporate guarantor of banks and credit unions prompted Gov. Bruce Sundlun to indefinitely shutter 45 lenders. More than F$1 billion belonging to 150,000 people was frozen. A year later, 36 of the lenders had been reopened, but depositors in the remaining nine had gotten back no more than 10 percent of their funds.

The collapse was prompted by the doings of Joseph Mollicone Jr., who ran Heritage Loan and Investment Co. and who allegedly embezzled F$13.8 million from it before it slipped into insolvency. The bailout by Rhode Island Share & Deposit Indemnity Corp. so damaged the guarantor, that it was declared unable to guarantee its other clients.

Chattanooga has had local banks in trouble during the meltdown, and some took TARP money from the U.S. government. The most recent bank run I know of was in 1991, when a rumor about a bank executive sparked a one-day run at Fidelity Federal Savings Bank on Jan. 4, three days after the Rhode Island governor seized 45 lenders in his state.

How strong the guarantor?

Every lender in Chattanooga operates on the basis of a fractional reserve, like those in Cyprus; none is liquid and none can meet a depositor stampede into cash without a guarantor’s rescue by armored car coming up from Atlanta. It is difficult, but not impossible, to live without using a bank, savings and loan or credit union. People who are wary of the banking sector might be wise to give no more than minimal exposure to them, keeping in only enough to pay expenses.

Our interest in local economy makes us favor local lenders versus national ones. That would be Tennessee Valley Federal Credit Union (in 13 area counties), Cornerstone, FSG, Community Trust and Northwest Georgia Bank (with five branches in Georgia and four in Chattanooga). The national and big regional banks would include Regions, SunTrust, First Tennessee, Bank of America and Wells Fargo.

We favor the local over the national not because they are free of the fractional reserve genetic defect. But they are proximate. If local people invest in local banks (buying their shares when offered) and deposit funds in them, these lenders will be stronger than national players that are deemed “too big to fail.” We can honor the ideas of local economy, provisionally disregarding the warnings of Cyprus.

Chattanooga, like any other American city, is vulnerable to the Cyprus disaster. Public confidence allows the game to go another year, another day. A bank can buckle from a fraud, or a wild rumor. But fraud and rumor keep the system afloat, as well.

We have the assurance that the FDIC will make depositors whole after a given bank fails. To many, a federally chartered backer is reassuring. We are as confident in the FDIC as we are in other important branches and agencies overseen by President Obama. It is unimaginable than American depositors would be called upon to submit to a “tax” of their deposits to pay off lenders to Uncle Sam. Certainly American officials aren’t going to do the people of the country dirty — would they?

A final thought about the Rhode Island disaster. Only a few credit unions relied on the insolvent Rhode Island Share & Deposit Indemnity Corp. But thousands of fractional-reserve lenders rely on FDIC to bail them out. The FDIC has F$33 billion reserves for F$9.4 trillion in deposits. That suggests that the guarantor depositors rely on is involved in a charade, a con. A wild rumor shook Fidelity in the Chattanooga area in 1991. A wild and persistent rumor keeps the paper money system afloat in Chattanooga and your city, as well.

City needs institution with 100% reserve outside bank system

Bankers are reassuring. “Simply put, U.S. insured depositors are safe and their deposits are protected by a strong FDIC fund, a financially secure banking system and the full faith and credit of the U.S.,” the American Banking Association says.

The guarantor of the FDIC is Uncle Sam. How’s he doing? He is F$16 trillion in the hole by way of contractual paper obligations and the hiccuping sot is liable for F$212 trillion altogether in covenants, agreements, compacts, treaties and political IOUs through its congress.

In the holy scriptures, the 9th commandment of bearing false witness seems to have been ignored by the system and its operators. As has the 10th on coveting, and the eighth on stealing by depreciating the people’s means of exchange. The closer we consider the highest standard, issued by the highest guarantor, God enthroned in heaven, the stronger might we feel to consider an contingency plan for Chattanooga, one avoiding the word “fraction” or “fractional” in any description of its asset base.

How about the word “whole.” Could Chattanooga devise a depository institution with a 100 percent reserve? It wouldn’t be a bank, but it could be a lender, and it could accept both deposits and venture capital. Are you thinking again about a Nooga-centric investment co-op such as the one I discussed with Jim Place? Could a hometown investment and depository co-op be a solution to the banking crisis that is going to wreck the country? Could it help us elude some of the losses, some of the damage?

Sources: “Bank of Cyprus depositors get costly ‘haircut’; Bailout could shave off 60 percent,” Associated Press, Washington Times website

Douglas French, “Deposit Taxes: Should We Prepare,” March 21, 2013,

One Response

  1. Fred Flint

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