Professor Elam

THe collapse of the oil prices in 1986 resulted in virutally everyhttp:/bvank in Odedssa, TX failing. The FDIC was created as a resutl fo the Craqsh of 1929.  FDIC stands for Federal Deposit Insurance Corporation.  It insures customer deposits to a ceiling level. Amounts in the bank over this amount are not insured.

Columbian Bank had deposits in excess of this limit. Apparently the FDIC is not going to cover those deposits. The Crash of 1929 was not just a waterfall decline in stock prices. Banks at that time were allowed to loan  money on stock purchases. In fact banks could loan 90% of the purchase price. When stock prices declined more than 10% the collateral was gone.  The Crash occurred in Oct of 1929. By March of 1930 prices had  declined such that one third of the banks in the US would close, along with the loss of all the depositors' money.  This wiped out one third of the money supply in the US as the Dow Industrials fell from 390 to a low of 41.  Such borrowed money purchaseds are known as going on MARGIN. The margin is the deposit the customer makes to purcdhase the stock.

Congress passed the Glass Stegall Act to prevent banks from lending on securities. Phil Gramm sponsored legislation repealing this provision in 1999. His time, he is an economist by the way, could not have been worse.  Banks got into the sub prime mortgage and well if you read the blog you know the rest- CITI, USB and many others have essentially gone broke and had to be re capitalized.

Today margin requirements are 50%. While this sounds realistic, consider that leverage or potential margin is actually infinitely higher. ONe can now deal in all sorts of sophisticated derivatives (which means Wall Street knows what it is doing right up to the point of going broke in which case they need a bail out as they are ttoo big to fail) such as puts, calls, indices, derivatives, reverse interest rate swaps, sliced and diced mortgages, etc.  Witness the fall from Dow 14,000 last year to 11,500 today.

We study accounting and the blog attempts to link finance and economics into a more understandable curriculum palette so that students can see the big picture.