Letter Re: Surviving 90 Miles from the US — A Cuban-American Exile’s View

A brief background of myself. I am an Telecommunications Engineer, I served three years in the Cuban army as an Engineer in several units (it was mandatory unless you were integrated with the system, in which case you will get a better civilian job). After I served my time they did not want to release me (basically no one wants to stay unless you are willing to do their bidding) so they offered 2 years to a very harsh unit that stays in the mountains for months end ready to be sent anywhere, or stay for 20 years in very comfortable position as an Engineer, I sucked up the two years (30 months
actually) and then left and never again worked for the government, but I was walking a very fine line. I left the country illegally. They would never let me go, everybody needs permission to leave the country. This was more than 15 years ago and this is the first time that I have talked about it freely with someone outside my very close circle of family and friends. Please do not mention my surname.

The government controls everything, I mean everything, from health, to communications, from commerce to defense. When government controls everything there is absolutely nothing you can do. They determine what is legal and sometimes they let you get away with it, as long as you do not mess with the regime. They can take you to jail for anything because as I said everything is illegal. You cannot legally sell a house, only cars that were in the country before 1959 can be sold legally, [Owning a] DirecTV [satellite television receiver] is illegal. The list goes on and on.

In order to survive you must depend on the government or go black market. There is something called the Comite de Defensa de la Revolucion (CDR), basically is an organization at community block level that monitors everything that happens and reports to the government, it is completely volunteer, but it tells you how low citizens will go.

Electrical Power is obviously controlled by the government, and they impose restrictions so you will have times that power will come on for only a few hours a day, people have converters because generators are hard to get and even harder to get gas for them (it is expensive, a gallon goes for about 8 dollars a gallon last time I heard), to use the converter you hide in a room to watch some TV, have a fan for the heat and that’s it. You must try to hide, as much as you can, the things that you have, because you might get robbed. Being robbed at home is nothing new, you try to be as modest
as you can–otherwise you will become a target, by thieves or the government if you are getting too out of control.

Water is also government controlled, it does the same as with the electrical power, you can go days without water, so every house has water tanks to store water, even in buildings people will have water tanks in the bathroom. Drinking water always needs to be boiled.

People will raise pigs in a bathtub in the bathroom or if you are lucky to have a small backyard and someone to watch over it because it will be stolen. Pig will give meat and the fat you need to cook.

People that live in the countryside can raise animals and food, they can sell it under government supervision, they cannot become wealthy because government will intervene and accuse them of “exploiting” others.

It is illegal to kill a cow or a horse, as the government has a strict control. [If you slaughter one without prior approval and are caught,] you will serve the same time as if you killed a human being. People will slaughter a cow and dispose of it in two hours and “disappear” the remains by burning it with car tires because it burns very hot. And then you have to be careful how to transport [the meat] because they will have checkpoints. They can stop you anywhere, anytime for any reason and ask to search your vehicle.

You have to be extremely careful on who you trust, because they could be a government informer. (Did you see how our government is asking [their allies] to report when they see something “fishy” about [opposition to socialized] healthcare? That scares the h*** out of me.)

Not everyone can move to the countryside because the government controls that, they control movement within the country, you just can’t pick up your stuff and decide to move, so you have to make a living where you are. In the countryside you’ll have more food but they will cut electrical power more often. I used to install alarms (on my own, I refused to work for the government) for farmers that had pigs, pigs are raised in jail-like cages to avoid thievery, so I would install an alarm with battery backup because they had so much power shortages.

It goes without saying that [privately-owned] guns are illegal.

I just wanted to give an idea about how people live under a [total] government-controlled country. They will slowly take away your liberties and you will find out one day that you have nothing. And your fellow citizens will go as low as they can to survive. Government would threaten their family and force you to do what they say. This is always under the [mantle of] “we are doing it for the benefit of the majority, and only because we are in a crisis”, but there is always a crisis.

They will say that you do not want to work for the improvement of the country, that you are against your people, they will make things up, and suddenly you will become a pariah. Does it sound familiar “… these mobs against health care are destroying the democratic process…” Next it will be “they are organized by the enemies of democracy” and suddenly “we need to eliminate this threats to our democracy”.

Never think it cannot happen [here in the United States]. Sincerely, – Ignacio

Letter Re: The Virtues of Fasting Experience for Well-Rounded Preparedness

Greetings!

I have an idea that I have been wanting the patriot survival community to consider. Here it is:

Basically we are able to go without food for much longer than most people know. This is not true with water to be sure. A normal, reasonably healthy human body is easily capable of going three to six weeks on very, very little nutrition and remain completely mentally alert and even physically active. During a prolonged fast you will not be able to pick up as much furniture as normal but you may easily be able to walk for 100 miles!

The biggest concern with fasting is that it not begin too abruptly. Most trouble comes from toxic reactions not lack of nutrients. Its better to reduce junk foods, sweets, red meat and unnecessary drugs & medications before embarking on a serious fast. A series of single-day or two and three day fasts are rejuvenating like nothing imaginable! Juice fasts and broth fasts and even solid, bland diet (rice & red lentils) are intermediate steps. Health food stores often have written material on fasting techniques.

Fasting is very healthy and has an unmistakable spiritual side to it as well. It increases mental health and will power. It is an excellent occasion to practice prayer, meditation and all sorts of mental work. Benjamin Franklin, for one, extolled the virtues of keeping the mind full and the bowels empty. This is all in the preparatory phase while you are teaching yourself how to fast, how your body reacts, how your mind reacts, what to make of any “hunger pains” and in general learning that you don’t need to consume all you are accustomed to. Watch your will power grow!

Once you are “hardened off” and experienced in “coming closer to your own inner nature” (you now know how to consume your own substance without cutting off an arm or leg to try to keep the stomach full) you should wax serene in circumstances where others may easily fall prey to panic. In cases of stand off, siege, emergency or just plain prolonged lean rations you can totally, effortlessly and fearlessly rise above the circumstances.

I can tell you of how it has worked for me, in Hurricane Andrew for example, where people rioted or scuffled needlessly over ice. But I had not intended to write so much. I just wanted to get the idea across. Best Regards, – WL

JWR Replies: Those unaccustomed to fasting should first consult their doctor for a checkup. Your tolerance for fasting will vary greatly, depending on your diet, your body type (fat reserves), your blood sugar chemistry, and your activity level. Rather than water fasting–which can be debilitating and precipitate some acute health problems–I recommend occasional juice fasting, to maintain your electrolyte and blood sugar balance. My general advice is to build up to fasting gradually, while very carefully watching for adverse reactions, such as dizziness, confusion, or hallucinations. Even someone with regular fasting experience should never fast more than 36 hours while living alone. There must be someone there to watch for signs of distress or incipient syncope (fainting). Fasting can be beneficial, but as with anything else, when done to excess, it can be harmful.

Letter Re: Acquiring Pre-1965 Silver Coinage

Hello James,

I’ve been an avid reader of Survivalblog for two years now. I have also read and passed along “Patriots” when I bought it on Amazon, during the Book Bomb event in April. I also purchased the“Rawles Gets You Ready” preparedness course a couple of years ago. I’m prepping even as I’m typing this.

During this economic downturn starting in the last year or so, the corporation I work for has demanded no more overtime, cut back on the company match for our 401k, and since no one is buying anything, my sales commissions have gone to almost $0.

To try to make up for lost income, I got a part time job (24 or so hours per week) working at a liquor store behind the counter. This store is located in a more or less seedy part of town. We are surrounded by Section 8 housing, with a 7-11 [convenience store] next door. This location makes for quite a mix of customers. The store owner is of foreign origin, and does not distinguish the difference between a silver coin and a paper dollar.

In these times of rising unemployment, higher gas, food, and general living prices, our customers have resorted to digging in the sofa, robbing their child’s piggy bank, and got into the family stash of money. Some of this money is spent at the store in the form of junk silver coins. For an example, a woman came in with a fine condition silver dollar (worth $17.00 at the time), and 29 pennies to buy a 24 oz. [bottle of] beer. I immediately put a paper dollar in the register, and pocketed the coin. Since then, I have found pre-1965 quarters, dimes, and several wheat pennies. Just yesterday, a man came in and paid with three pre-1965 half dollars.

I just wanted to make people aware that there is a lot of junk sliver out there, and that people are starting to spend it. They either do not know the value of what they have, or they just don’t care.

If you are in the retail trade, keep your eyes open for silver coins. They have become unmistakable to me in my short time of looking. They make a totally different sound when they hit the counter, and they also “look” different. Not so much the shiny “new” coin look, but almost a dull silver finish. I will continue to collect the junk silver for as long as I’m working there.

Keep up the good work, and the writing. My prayers are with you and the Memsahib.

Regards, – JK in Colorado

JWR Replies: Readers should be advised that a large percentage of the silver coinage found in high crime areas has re-entered circulation because it is being spent by drug addicts that have conducted residential burglaries. Unless they are stupid enough to “spend” a numismatic coin that is still encapsulated in a serialized slab, stolen coins are essentially untraceable. Needless to say, retail merchants should avoid “fencing” stolen items.

Economics and Investing:

From Theo M.: Deficit grew by $181 billion in July

Chris H. flagged this: No Longer Jobless, But Still Struggling

Frequent contributor Karen H. kindly sent several items:

Fed Focusing on Real-Estate Recession “The collapse in commercial real estate is preventing Federal Reserve Chairman Ben S. Bernanke from declaring the economy and financial markets are healed.” (JWR has predicted this for quite some time.)

Treasurers’ Fear of Next Credit Freeze Shown in Cash Hoarding “Cash is king,” said Paul Kasriel, the chief economist at Northern Trust Corp. in Chicago. “Businesses are in survival mode right now.”

Minneapolis Federal Reserve Inflation Calculator (see the upper right hand corner of their web page)

States End Up Losers in Gambling Pullback (one more reason we will all be seeing a tax increase)

Vacancies Suppress Southern California Recovery

Unemployment Among Teenagers Remains Stubbornly High

U.S. banks to make $38 Billion from overdraft fees

Krugman says world avoided second Great Depression “Still, recovery was likely to be “disappointing” as government spending wasn’t sustainable in the long-run and unemployment rate still lagging behind, he told a two-day world capital markets conference here.”

Odds ‘n Sods:

I was doing some research on sunspot cycles (whilst pondering whether it would be worthwhile to buy some more ham radio gear to work the 40 and 80 meter bands), and I stumbled across this web page from Finland: Timo Niroma: One possible explanation for the cyclicity in the Sun. Part 5 talks about possible climate change. It would be incredibly ironic if this new century were to be a Little Ice Age rather than the much-heralded Global Warming that Al Gore et al have been shouting about. Needless to say, the climate change jury is still out, and there are still huge unresolved differences of opinion. I believe that it is prudent to be ready for all eventualities, regardless. One contingency plan would be to develop the readiness and willingness to move thousands of miles, if there is a pronounced climate change in your lifetime.

   o o o

William C. sent me the link to this interesting page: Pedal Powered Generator.

   o o o

KAF spotted this in The Times Online: Food crisis could force wartime rations and vegetarian diet on Britons

   o o o

Our friend Tamara has some commentary on beneficent distribution of farm produce. For those who will be farming in the unfolding depression: Remember to grow an extra row for the gleaners. Charity is our duty!

Notes from JWR:

We’ve reached the milestone of 10 million unique visits for SurvivalBlog. When I first set up the blog visits counter in 2005, I thought that it would take a decade or two before we’d ever fill up all the places in an eight digit counter. My, was I wrong! Thanks for making this the world’s most popular blog on survival and preparedness topics. We get more traffic than all the smaller survival and preparedness blogs, combined. Please keep spreading the word. A link to SurvivalBlog in your blog or web page would be greatly appreciated. Thanks!

Today we present another entry for Round 24 of the SurvivalBlog non-fiction writing contest.

First Prize: A.) A course certificate from onPoint Tactical. This certificate will be for the prize winner’s choice of three-day civilian courses. (Excluding those restricted for military or government teams.) Three day onPoint courses normally cost between $500 and $600, and B.) Two cases of Mountain House freeze dried assorted entrees, in #10 cans, courtesy of Ready Made Resources. (A $392 value.) and C.) A HAZARiD Decontamination Kit from Safecastle.com. (A $345 value.)

Second Prize: A “grab bag” of preparedness gear and books from Jim’s Amazing Secret Bunker of Redundant Redundancy (JASBORR) with a retail value of at least $350.

Third Prize: A copy of my “Rawles Gets You Ready” preparedness course, from Arbogast Publishing.

Round 24 ends on September 30th, so get busy writing and e-mail us your entry. Remember that articles that relate practical “how to” skills for survival have an advantage in the judging.

This article might at first glance appear to be of no interest to non-hunters or even a bit off-topic for the blog. But consider this: The same mammalian physiology principles apply to both four-legged and two-legged lead recipients. And remember: The two-legged ones shoot back, so you’ll want to incapacitate your target as quickly as possible.

Terminal Ballistics for Big Game, by Old Dog

The following is based on over 25 years making a living as a licensed guide in Alaska and as a professional hunter in Africa. Between clients shooting game and cull hunts I have personally seen over 7,000 big game (250 lbs or more) animals die from gunshots. I have formed my opinions on terminal ballistics from this experience

The Biggest Myth that I hear is faster projectiles (Velocity) kills better than slow ones. As long as the projectile stays above supersonic it will kill big game effectively with a properly constructed bullet.

Second Biggest Myth is that more foot-pounds of energy = better killing/stopping power. Foot pounds of energy is just a mathematical figure and has very little to do with stopping or killing power.

Bullet diameters and bullet design has more to do with killing/stopping power than speed. The best hunting bullets are the ones that perform over the widest range of velocities, leave the largest permanent wound channel, will not brake apart when they hit heavy bone and will consistently exit the animal on a broadside shot.

On big game larger heavier bullets kill better than smaller faster ones.
At close range, a flat-nosed 540 grain bullet fired from a .45-70 at 1,550 FPS has far more stopping/ killing power than any of the .30, .338 or .375 magnum. But at the same time a projectile with a flat trajectories is easer to make good hits at longer ranges than the slow moving 540 grain slug from the .45-70.

Faster bullets do give better trajectory and extend the range we can make good hits at. A good hit with a smaller caliber is always better than a poor hit with a larger caliber

For consistent kills on big game, the larger caliber bullet the better and the heaviest bullet for a given caliber will have the best knock down power.

For the first third of my guiding career I thought that perfect bullet performance was to find the bullet in the hide on the far side. That way all the energy has been absorb by the animal. . Over the years I changed my opinion for the following reasons

1. Exit wounds leave a lot better blood trail.

2. Granted, most shots taken are broadside but if a bullet cannot punch through an animal with a broadside shot and exit the animal then it does not have enough penetration to go end to end on an animal. You do not always get broadside shots while hunting and rarely get a broadside shot on a charging or fleeing critter.

3. I want my bullets to be able to break heavy bone and continue to penetrate deeply afterwards.

4. I no longer believe that it is the energy that kills but the size of the wound channel.

There is no best bullet (or caliber) for hunting. Even the best designed bullet will occasionally fail to do the job it is intended to do, Poorly made or poorly designed bullets will conversely give spectacular killing results from time to time.

It is the trend that is important in bullets. From my point of view a half dozen cases of good or poor bullet performance is not much of a trend. Around a hundred is what I want to see. I once witnessed a Kudu (elk-sized African Antelope) shot at 40 yards with a .416 using a 400 grain swift a frame. The well placed bullet hit the Kudu broadside. It ran off and we had to track it for two days. The shot placement was good the cartridge and bullet excellent but it still failed. The same client shot a cape buff with all the same conditions/shot placement and the buff fell over dead with the one shot. The bullet exited after breaking the shoulder. Neither of these isolated cases proves anything.

All bullets are a compromise: No Spire point bullet will ever have as good of terminal ballistics as a flat meplat bullet and no flat nosed bullet has as good of arrow dynamics as a spire point.

The best killing and the best knock down bullets have a large flat nose with a sharp edge (large meplat). Elmer Keith and J.D. Jones have both promoted this concept with handgun bullets. The best example for a rifle is Randy Garrett’s 540 Grain .45-caliber bullet loaded in his .45-70+P ammo. Up close this round has more stopping power than conventional hunting bullets shot from the .458 Winchester Magnum. Now the Garrett 540 grain bullet is fantastic at close range but not what I would recommend for long range situations and it will not feed reliably in most bolt actions. Check out the Garrett ammo web site, read the data how his .45-70 ammo out-penetrates the .458 Winchester.

I have had clients make clean kills on big game using every thing from .223 to .50 but the best consistency for clean kills was with large [diameter] heavy projectiles. Most of my career I used one of three calibers: 308 Winchester, .375 H&H and .470 [Nitro Express]. For cull hunts and wolf hunting I used .308. Every 7.62mm diameter bullet can kill. Military ball [aka full metal jacket (FMJ)] was supplied for most cull hunts. Ball is the worst, but it works in a pinch. The best killing bullets I found in .308 caliber was the [Nosler] Fail Safe and Barnes X bullet. There other very good bullets but the Barnes and Fail Safe stand out in my mind.

For guiding in Alaska and for African plains game I used 375 H&H. The .375 diameter 300-grain Sierra is a wonderfully accurate bullet but at close range it comes apart and sheds it’s jacket fairly often so I do not recommend it for big Bear, Cape Buffalo, Hippo or Rhino. The Barnes, Nosler partition, Swift A-frame and Trophy Bonded are all wonderful .375 projectiles and usually hold together at close range. I would use any of the 4 and pick the one that shoots the best in your particular rifle.

I am not a fan of the .375 for Cape Buffalo, Hippo or Rhino. The .416 or .458 with the Barnes X or trophy bonded seems to be the most consistent killer at all ranges on the thick skinned game. A good .470 or .500 double rifle is best for the big stuff but not many can justify spending $10,000+ for a double rifle and at least $10 per round of ammo.

Enough of my rambling this is the bottom line. Shot Placement is the Single Most Important Factor.
For big game use the largest caliber with the heaviest bullet that you can shoot accurately. I would rather a client show up on a Grizzly hunt with a 30-06 that he can shoot well than a have him bring a .375 that he does not shoot accurately. Use premium hunting bullets–not target bullets–for big game. – Old Dog in Alaska

Letter Re: Preventing Steel Food Cans from Rusting in High-Moisture Environments

Hello James and Memsahib!
Greetings and prayers for you both. In the Saturday August 8th blog there was a report of damage to underground storage food, with cans rusting.

When we traveled for years on our sailboat we varnished our canned goods to prevent rusting. We removed the labels, wrote the contents of the can with a permanent marker, then varnished each can. We never had a can rust with this protection. Our cans were exposed to salt air and an occasional dousing from bilge water.
B.B. thought that waxing his cans would help. That may work but any contact against the wax may remove some protection and defeat the purpose.
We read your blog daily and have learned much. “Patriots” is being read by all family members and we are praying for your bride.
With warm regards, – Ray & Vickie

Economics and Investing:

GG flagged this: Banks still getting sicker; The economy may have turned, but banks will be cleaning up after their lending mistakes for years. Several big banks may already be doomed to fail.

Also from GG: Bank of England surprises markets with move to increase ‘printing money’ plan

This was linked at the excellent news aggregation blog Total Investor blog: ‘Lost Couple of Decades’ Looming for U.S. Economy: Chart of Day

Several SurvivalBloggers sent us this: Obama announces $2.4 billion grant for electric vehicles

Items from The Economatrix:

Audio Clip: Unemployment Decline “A Little Bit Misleading” Analyst says “people have withdrawn because they are discouraged”

Entering The Greatest Depression In History “On May 13, 2009, Celente released a Trend Alert, reporting that, “The biggest financial bubble in history is being inflated in plain sight,” and that, “This is the Mother of All Bubbles, and when it explodes […] it will signal the end to the boom/bust cycle that has characterized economic activity throughout the developed world.”

Iceland: Economic Lessons Learned From the Meltdown

Rich Dad, Underwater Dad: 21 Million Homeowners With Negative Equity Or No Equity In Their Homes

Hot and Cold of Economic Winter (The Mogambo Guru)

Obama Says US Economy Saved from Catastrophe [JWR’s comment: Don’t spoil the moment by telling him about the next tidal wave of foreclosures.]

Gold Slips on Stronger Dollar, Other Metals Rise

US Labor Dept. Shows 70% of American Industries Are Cutting Jobs

Job Loss Recovery May Take “Several” Years

California Won’t Accept its Own IOUs

Odds ‘n Sods:

F.G. spotted this bit of inspiration for SurvivalBlog’s older readers: Never Too Old: The Story of Captain Samuel Whittemore. (Who went to war at age 80.)

   o o o

Do you remember my comments back in May, on the “Three K” depression-proof jobs? This Fox News article confirms it: Now Hiring: Everywhere You Didn’t Want to Work

   o o o

The recent much-publicized dehydration death of a child in Death Valley, California, prompted several SurvivalBlog readers to comment. The consensus on vehicular off-pavement travel in desert country is to over-prepare: Carry two spare mounted tires, extra fuel, sleeping bags, a full array of pioneer tools, and a couple of five-gallon water cans. Also, do not rely on GPS. Gadgets are not a replacement for common sense and map-reading skills!

   o o o

Since SurvivalBlog’s readership is international, I don’t focus much on politics, except for issues that relate to preparedness, such as civilian disarmament (“gun control” and edged weapons laws.) But there is a noteworthy movement in the United States that is an outgrowth of the “Tea Party” protests, as described by the Wall Street Journal: Nationwide Fury: A Town Hall Protest In Maryland. And here is similar Salon article: Two Town Hall Meetings Turn Into Near Riots.

Jim’s Quote of the Day:

“I told a reporter here a while back–young girl, seemed nice enough, she was just tryin’ to be a reporter. She said: ‘Sheriff how come you let crime get so out of hand in your county?’ Sounded like a fair question. Anyway I told her, I said: Any time you quit hearing ‘Sir’ and ‘Ma’am’ the end is pretty much in sight.” – Tommy Lee Jones as Terrell County Texas Sheriff Ed Tom Bell, from the movie No Country for Old Men, 2005 (originally written by Cormack McCarthy)

Note from JWR:

Today we present a guest article from my mentor, Dr. Gary North. It was Gary that first inspired me to launch SurvivalBlog. I highly recommend subscribing to his free e-newsletter, Reality Check.

Delay and Pray: Why the FDIC is Broke, by Dr. Gary North

“If it ain’t broke, don’t fix it.” — Burt Lance

“If it is broke, don’t admit it before you absolutely must, and then blame it on events that no one could have foreseen.” — [Gary North’s] universal law of bureaucracy

Burt Lance was briefly the head of the Office of Management and Budget under Jimmy Carter. He was a Good Old Boy from the banking world of Georgia. A William Safire piece, “Broken Lance,” created enough bad publicity to persuade Lance to retire in September 1977. The article won Safire a Pulitzer Price.

Lance’s aphorism, taken from the South, has been with us ever since.

I made up the second aphorism. It is based on my 40+ years of studying government bureaucracies.

The FDIC adheres to the second rule with remarkable tenacity. It closes no banks until Friday afternoon. This ensures that there will not be a run on the bank.

BANK RUNS

A bank run today is not the old-fashioned kind that we see every Christmas season when we watch “It’s a Wonderful Life.” That was a pre-FDIC bank run. A bank run took place in the Great Depression when depositors, who had been promised payment in currency on demand, exercised their contractual rights. The banks were unable to fulfill their contractual obligations because they had loaned out the
deposits. The deposits were short-term. The loans were longer-term.

Longest of all for banks were home mortgages: five years with 50% down. Longest of all were home loans made by Building & Loans, what we called Savings & Loans until the crisis of the mid-1980’s forced them to become banks.

“Borrowed short and lent long.” That was Jimmy Stewart’s problem in the movie.

Potter ran a solvent bank. He had not made long-term loans. The bank could cash in his short-term loans and pay its depositors. It could meet its contractual obligations.

Wicked, mean Potter!

In contrast was the lovable George Bailey. His institution had made long-term loans. It stayed solvent during a bank run only because (1) Bailey gave up his $2,000 honeymoon [savings] money (about $20,000 in today’s money); and (2) the bank run ended at 6 p.m. The bank run did not start up again the next day. That wasn’t the work of Clarence, the wingless angel. That was the work of Frank Capra’s screenwriters.

Over 6,000 small banks went bankrupt, 1930-33. The FDIC was created in 1934 to prevent that kind of bank run. Its presence calmed depositors, who knew that a government- chartered institution insured their accounts.

The FDIC eliminated the old-fashioned bank run. It replaced it with the modern bank run. This is the type of run we see every Friday afternoon.

This run does not involve depositors going to a suspect bank’s ATM and pulling out currency. No one uses that much currency in conventional markets — only in black markets, Latino men on the street corner markets, and gun shows.

Instead, they send a bank wire draft to make a deposit in a different bank. Or they write a check to a different bank and open an account.

When the money is deducted from the first bank, this reduced its liabilities. This must be balanced by an equal reduction of its assets. But a bank that is in trouble has illiquid assets. It must sell these at a loss. The net worth of the bank falls. The capitalized value of the bank falls. By law, the FDIC must intervene to shut down the bank when the solvency of the bank is threatened.

This law is not being obeyed. Why not?

“If it is broke, don’t admit it before you absolutely must, and then blame it on events that no one could have foreseen.”

Why does the FDIC wait until Friday afternoon to announce that a bank has been closed by the FDIC. To make the transfer of ownership legal by Monday morning, when it opens for business. “Under new management” means “you don’t have to send your money elsewhere.” This reduces fear.

If the FDIC closed a bank on Monday, before it had lined up a buyer, there would be a run on the bank all week. Depositors would shift their funds elsewhere. The FDIC would still be left holding the bag. The bag would have lots more IOUs to depositors by the end of the week. It is a bag filled with red ink.

The FDIC is liable for the deposits. The more pulled deposits, the lower the capitalized value of the bank. This means the FDIC is on the hook for more money. It wanted an outside bank to buy these liabilities and assets. If the liabilities must be covered by the FDIC, the FDIC must sell its assets.

It has less than $12 billion in assets remaining. It had $52.4 billion in 2007.

The following letter is posted on the FDIC’s web site. It is from an unidentified banker in Alabama. Here, we read the following:

If the public were to understand that the FDIC’s deposit insurance fund was at or near the point of depletion there would be a massive run on every bank in the country and the any remaining stability in the financial industry would be gone. This would likely result in the government having to take over more of these failed institutions and eventually having to guarantee all deposits thus resulting in a nationalized
banking system, which I 100% opposed.

If the FDIC posts a letter like this on its web site, then I conclude that the FDIC takes seriously this scenario.

The FDIC has a FAQ list on its site. The list does not include these questions, which I guess are not frequently asked:

How much money does the FDIC have in reserve?

How much money in commercial bank deposits does
this reserve base insure?

Where does the FDIC invest its assets?

Who insures these assets?

At the end of 2008, its annual report revealed that reserves were down to $17.2 billion (Fund balance — ending). That was down from $52.4 billion at the end of 2007.

Beginning in January 2009, 69 banks have failed. The list is here. [JWR Adds: Since Gary wrote this article last week, the tally of failed banks for 2009 has increased to 72.]

The general estimate is that the FDIC’s reserves are around $12 billion. They were at $13 billion in March. The ratio of FDIC reserves to banks assets covered was 0.27%, or 27 cents for every $100 in bank deposits.

The FDIC keeps its [so-called] reserves in short-term U.S. Treasury debt. So, every time it sells T-bills, the government must find a buyer, presumably in the private sector. The FDIC has access to money only by moving T-bills out of the government sector and into the private sector.

If there are no buyers, the Federal Reserve will buy the T-bills. So, the Federal Reserve System is the ultimate insurer of the banking system. How can it do this? By creating money out of nothing.

DELAYING THE ANNOUNCEMENT

The FDIC has an incentive to delay the announcement of another bank failure. If the bank can somehow dig its way out of its crisis, the FDIC conserves its reserves.

In March of 2009 Senator Dodd introduced a bill into the Senate, S. 541. If passed, it will grant the FDIC a $500 billion line of credit. It has not been debated in the Senate or the House. Why not? Publicity.

“If it is broke, don’t admit it before you absolutely must, and then blame it on events that no one could have foreseen.”

The FDIC is delaying the announcement of its takeover of three regional banks whose liabilities could deplete the FDIC’s reserves. Karl Denninger posted a revealing report on his site on August 2. It considered the situation facing these three banks. Two of them have reported negative Tier-1 Ratios. This means that they have a negative ratio of assets versus liabilities. They are legally bankrupt.

The third bank needs a $500 million infusion of private capital, plus another $500 million from the Federal government. If this bank goes under, it will be the sixth largest bank failure, by assets, in U.S. history.

It has $20 billion in assets. How much money might the FDIC be forced to raise by selling its own assets if this bank goes under? In the case of Florida’s BankUnited, which had $12.8 billion in assets, the FDIC had to pony up almost $5 billion. That was a loss of 40% of assets, Denninger points out. Yet the bank showed nothing like this loss until it was shut down. Neither did IndyMac.

The FDIC has not closed any of the three banks. By law, it must take Protective Corrective Action, Denninger says. It hasn’t.

These three banks are regional banks, not small local banks whose losses the FDIC can afford to absorb without much publicity on a Friday afternoon.

 

PAR FOR THE GOVERNMENT’S COURSE

Why did the other busted banks suffer such enormous percentage losses when the banks’ accountants revealed nothing like this? Denninger offers a cogent explanation.

An enormous number of banks are holding loans at or close to “par” that really aren’t. They’re holding mortgages at massively-inflated values, even on defaulted properties, and this is why you
are not seeing more foreclosure sales – that is, why inventory is being held back. If they sell it the accountants will force recognition of the loss, which will render them instantly insolvent, but so long as they “extend and pretend” they are marking these loans way, way above recovery value. The upshot of this is that these firms’ balance sheet claims on asset values are massively inflated, regulators know it, and
they’re intentionally ignoring it.

If this is true, which I think it is, then the continuing crisis in housing will pressure the banks even more. The suggestion that the crisis is over ignores the looming losses from defaults on re-sets of Alt-A mortgages and Option ARM mortgages. Over he next two years, they will rival the losses inflicted on lenders by subprime mortgages. The chart is here.

Denninger’s conclusion seems sensible to me.

The claim of banking sector health and “successful rescue by Treasury and The Fed” is in fact false. No such thing has occurred. What’s going on here is nothing more or less than intentional false claims of asset “valuation”, which is repeatedly exposed when the FDIC is finally forced to seize institutions, exposing the lies. Then, suddenly, 20, 30, even 40% losses on alleged “asset books” come out into the
light and the taxpayer eats them.

The banks are allowed to carry these dead and dying assets on their books at par value. This is par for the course — the government’s course.

[Like Denninger], I believe the FDIC is broke and knows it; that under the law they should have seized these three banks (and many dozens more, including some really big ones) some time ago, but doing so will force them to tap the Treasury “emergency” credit line. They’re well-aware that this could instill quite a bit of panic in the public (never mind Congress!); as such they, along with [the Office of Thrift Supervision] OTS and [Office of the Comptroller of the Currency] OCC are conspiring to (once again) hide the truth and pray for an economic recovery before they are forced to act as the law demanded months or even years ago!

This policy of delay and pray is pushing up the stock market. He pointed out that insider sales by corporate executives are higher today than an any time since late 2007. They know what is going on inside their own firms.

CONCLUSIONS

When banks refuse to sell empty foreclosed houses, the houses deteriorate. The bankers delay and pray, hoping the housing market will turn back up. They don’t want to list these properties as losses. They are allowed to delay such a listing until the properties are sold.

Empty houses deteriorate fast: weather, squatters, and vandals. This is why private property insurance firms revoke property damage insurance after 30 days of vacancy.

These capital losses are mounting, thereby lowering the value of the loans’ collateral. These are hidden losses. The lenders’ books do not record these losses.

The longer banks delay sales of foreclosed houses, the greater the capital losses for these banks.

The longer the FDIC refuses to close these banks and get these properties sold, the larger the losses the FDIC will suffer when it finally closes the banks.

The longer these empty houses are not sold, the longer this sword of Damocles hangs over the residential real estate market. This delays the recovery: too much inventory.

This “shadow inventory” is not reported to any official institution. No one knows how large it is nationally. All that investors know is that it is large, and it will get larger.

Delay and pray will fail. But no government official will lose his or her job when the day of reckoning comes.

Delay and pray will therefore continue.

“If it is broke, don’t admit it before you absolutely must, and then blame it on events that no one could have foreseen.”