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03 November 2008

Bailout Plan - Confidence and Faith

The real goal of this bailout is to instill confidence and faith in America's financial system. This really is why the system works in the first place. Take the provision included in the new bailout plan of raising the FDIC insurance to $250,000 from $100,000 for example. This is designed to make people think that their money is safe and there is no reason to run to the bank and take it all out. A bank run contributed to Washington Mutual's failure. If people really gave this much thought they'd realize that the FDIC has about $30 billion dollars of insurance to cover $9 trillion dollars of deposits. I don't care if they insured depositors money for $1 million dollars, if a large number of banks begin to fail depositors will lose money.

Let's take this a step further. Millions of Americans (and people around the world) go to work everyday (if you're still lucky enough to have a job) and work their perverbial rear-ends off to make money. Business owners take varying degrees of risk to earn revenue and ultimately a profit. Then everyone takes this piece of paper with ink on it we call money and gives it to someone we don't even know, with complete confidence and faith that they will give it back when we ask for it. And if they don't or can't because their business failed, then the FDIC will give it back to us.

This only works because people have confidence and faith that they can access their money when they want. In fact, money is only money because people have faith that someone will take this piece of paper and give them some goods or services for it. And that "someone" only gives goods and services for it because they have confidence that someone else with do the same for them...and on and on.

That confidence and faith is developing cracks right now and the Government is attempting to stick some putty on it. Will it work? And how will your investments be affected? Time will tell. But if history is any guide, this exciting time will provide many opportunities as well.

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