Les Jones

Where do you put money if you’re concerned about bank failures?

Thursday, September 24th, 2009 | Best Of, Economics |

Over on this post Placebo has a question:

I’ve noticed you’ve posted quite a bit on banks failing. So where are you parking your money in light of this widespread problem? I know gold is one place …
Thanks!

Right now the FDIC is still guaranteeing everything. I don’t think anyone needs to panic as long as their accounts are FDIC-insured. Keeping your money in the bank is still safer than keeping it in your mattress where robbers and fire can take it. Bear in mind that the government recently stopped its temporary protection of money market accounts, so you may want to move money markets to an FDIC account or Treasuries.

Having said that, here are some things I’ve done in light of bank failures and other potential problems. All of my amateur investment advice is worth exactly what you paid for it.

Diversification
Over the years the money for the entire family - my wife and I, our children, my mother, and my brother - wound up in the same bank. That’s too many eggs in one basket. My wife and I recently opened a vacation and Christmas savings account at a credit union so that not all of our money is in one bank. As our CDs mature we’re going to move some of them to the credit union.

Incidentally, we’re discovering that the credit union has much better interest rates than our bank. So besides the protection of putting our eggs into different baskets we’re earning more interest.

Pre-payments
A few months ago I made an advance payment on the car. If the banks went totally wonky I’d have a month to get things straightened out with my car payment. That extra payment is also a form of savings - if I couldn’t pay my other bills I could call Honda Finance and tell them to not withdraw money from my checking account that month. I need to do the same thing with the mortgage.

Naturally you should pay off credit cards, not just now but always. You should never let money linger in your savings account at 0.5% when you have a credit card balance of 10%. Even in good times that’s bad math. In really super bad times it’s worse - the bank behind the savings account balance might disappear, but the credit card company behind your debt balance never will.

A little in cash
I keep a little more cash in my wallet than I used to a year ago. After payday I typically get $200-300 in cash from the bank.

In general, most people are too dependent on plastic for day to day expenses. It isn’t just bank failures that are a potential problem. A few years ago one of the satellites that processed credit cards stopped working. Some travelers found themselves out on the road with no way to buy enough gas to get to the next gas station, much less get home. If there’s a natural disaster that knocks out power no one will be able to take plastic. It’s been reported in some recent disasters and hurricane evacuations that ATMs ran out of money and there was no one around to refill them.

In an emergency where no one can take plastic many stores will run out of change. Avoid hundred dollar bills. Don’t depend entirely on twenties, either. Fives and ones are very useful, particularly now that many vending machines can take ones. Likewise, it’s good to have a roll of quarters in your emergency supplies for vending machines and payphones.

You say you won’t need a payphone because you have a cell phone? Think again. In the event of an extended power outage cell phone towers exhaust their batteries, rendering your cell phone useless. We now keep CB radios in both cars along with a roll of quarters.

A little more in cash
I’ve also moved a little more money to cash in a safe deposit box at the bank. Not a lot, but enough so that if we couldn’t use the debit card or credit card we’d be able to pay for gas and food for a couple of weeks. The safe deposit box is inside an alarmed, fireproof vault that’s hurricane- and earthquake-proof and that’s under the watch of an armed guard during bank hours. We also keep important documents and a backup hard drive in the box. Cost is $35 per year, a bargain.

The contents of the safe deposit box aren’t part of the banks assets, so they aren’t subject to bank losses. However, if the bank is shut by regulators you won’t be able to access the safety deposit box until the bank re-opens. Typically the bank is shut down before the weekend and the FDIC re-opens it after the weekend. However, there’s a possibility that might not be true in the event of some unforeseen series of events or national crisis. It’s something worth thinking about. Once again, don’t put all of your eggs in one basket.

What about inflation?

Inflation - not bank failures - are why you should move a portion of investment and savings intended for later use to something besides cash. Typically that means things like retirement funds or college funds with a long investment horizon.

Gold
For inflation protection gold is excellent and is on a roll. China, Russia, and Middle Eastern states are buying gold to get rid of their dollars. Hong Kong is recalling its gold to put into its own vaults. Barrick, the world’s largest gold miner, issued several billion dollars in new stock to close its gold short position. More arguments for gold can be found in this Doug Casey interview.

Think of gold as insurance. It might or might not dip a little in the next few months or next year, but it won’t get wiped out and it could do phenomenally well. The conditions that will cause gold to do well will cause a massive writedown in many of your dollar-denominated assets (which for most of us is all of our assets), which makes it an excellent hedge against not just inflation but against an extreme event like the collapse of the U.S. dollar.

Physical possession of metal is best because it doesn’t involve any counterparty risk. American Precious Metals Exchange sells bullion for a small premium over the spot price. The spot price assumes you’re moving gold within the assayed gold vault system in 100 ounce bars, so it’s fair to charge a premium over spot for things like U.S. gold double eagles or Canadian maple leafs.

For those of us investing in 401Ks there are ETFs (Exchange Traded Funds), which are traded like stocks but are based on holding commodities rather than shares of a company. I have shares of GLD, CEF, and GTU in my 401k and I’d like to add some SGOL. A conservative position might be 10-15% of your long-term investments.

Absolutely avoid leveraged and inverse ETFs, which are intraday plays for traders, not long-term investors. If the name mentions 2x or 3x it’s leveraged. Run away.

Other commodities and metals
I also have some other metals and energy ETFs, including SLV, OIL, UNG, and a little platinum. In the event of inflation commodities and metals should rise. Diversification here seems prudent. I wouldn’t mind picking up some uranium and some broad food commodities.

TIPS
Another, more conservative option is TIPS - Treasury Inflation-Protected Securities. They’re secured by the U.S. Treasury, just like traditional Treasury notes. The difference is that TIPS have a variable rate. They pay a low base interest rate plus the official U.S. government inflation rate.

Bear in mind that TIPS aren’t 100% inflation-proof for two reasons. One, the government manipulates the official inflation rate, whose definition keeps getting revised. (No, really. See Shadowstats.com. The official inflation rate hasn’t kept up with rising costs of health care, education, energy or assets in forever. Subsequently Americans have much less purchasing power now than they did a few decades ago.) Two, once inflation really gets going the government will likely shut the door on TIPS sales the same way they shut down inflation-adjusted Series I Bonds.

Still, TIPS are a simple, safe investment with no real downside that I can see. I have about 10% of my 401K in these via Vanguard Inflation-Protected Securities (VIPSX). Get ‘em while you can.

Tags: banks, fdic, gold, inflation

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