Fear about safety of bank deposits misses the mark



Q: Where's a safe place to put my money?

A: Try putting it in the stock market -- your money would be perfectly safe because no one would ever look for anything of value in the stock market these days. Ha ha.

Q: Where's a safe place to put my money?

A: Try putting it in real estate -- thousands of banking executives can't be wrong. Ha ha.

Q: Where's a safe place to put my money?

A: How about putting it in a bank?

How about putting it in a bank? More to the point, don't all those serious problems at MNC Financial mean it's possibly unsafe for you to keep money in its banking units -- Maryland National Bank and American Security Bank?

No, no, no, no, no, no.

Let's try once again to understand what's going on here.

MNC's troubles, although substantial, present no safety concerns for the typical depositor. By typical, I mean someone whose accounts are fully covered by the Federal Deposit Insurance Corp. The FDIC covers individual accounts up to $100,000, and will provide separate coverage to what I call affiliated accounts at each insured institution -- your individual account, an account you administer on behalf of a child, an individual retirement account, etc.

So, while you can't split up your $1 million in 10 identical accounts in your own name, it is not difficult for most people to have complete insurance protection for their money.

Now, if you are so wealthy as to have uninsured deposits, it means you'd be exposed to possible losses if one of MNC's banks -- Maryland National or American Security -- was unable to cover all of its depositors' full claims.

This could happen in the event of a failure of the bank that was so severe that federal regulators decided against financial assistance for the bank and allowed it to default on its obligations.

Such a failure is extremely remote. I say this not because I have any love for the way MNC became addicted to real estate loans but because the bank's basic condition was so sound that even a plummeting real estate market won't send it down the drain.

So, what we have is a situation where nearly all of MNC's individual customers have no reason to be concerned about the safety of the money, and a relative handful of customers have a small reason to be concerned. How small? I can't say, and, frankly, neither can the folks who run MNC.

We don't know how bad the recession will be, how badly shaken consumer confidence here is,and how much more money MNC (and many other lenders) will belosing on real estate loan portfolios.

So, if you do have uninsured funds, and this small risk of losing uninsured deposits bothers you, either try to restructure your accounts within MNC to insure your funds or move your uninsured funds intoinsured accounts at other institutions.

Good. Now that you have that concern out of the way, there's the small matter of whether your savings are going to be worth much in the years ahead.

There are three basic ways for the value of your savings to change, although we tend not to think about them this way very often. (Note to financial rocket scientists: Remember, I said basic ways.)

The first is simple enough: What is the rate of return on your savings? How much do you earn on your investments? This is the performance yardstick we apply all the time to our holdings, and for good reason.But it's not the only component of value.

A second element of value, or worth, is how much you can buy with your dollar in the domestic economy. We learned a painful lesson about inflation in the 1970s. Earning a 10 percent return on your money is not worth much if the rate of inflation is running at an even higher rate.

Older Americans on fixed incomes were especially victimized by the high rates of inflation a decade ago. Consumer prices rose by11.3 percent in 1979, 13.5 percent in 1980 and 10.3 percent in 1981.

Average rates on three-month U.S. Treasury bills were 10.0 percent in 1979, 11.5 percent in 1980 and 14.0 percent in 1981. If you held your money in T-bills or bank accounts during these years, you made no money after inflation and lost money if your earnings were subject to income taxes.

In addition to these two ways of thinking about the worth of your holdings, there's a third element that takes on much more importance in the kind of global marketplace we now inhabit. How much will your dollar buy in relationship to thepurchasing power of other currencies?

The relative purchasing power of the dollar wouldn't mean so much if we didn't purchase imported products or sell our products to people in other countries. But if you add up our imports and exports, they total about 30 percent of our gross national product, so you can see that what the dollar will buy overseas (and what foreigners have to spend to buy American goods and services) can be an important part of the value of your savings dollars.

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