Behind the Vault Part 3: When Banks Fail, You Foot the Bill
If you haven’t read our last post on why the Federal Reserve was created, check it out here for crucial context—it’ll make this dive into bank bailouts hit home. Today, we’re exposing the rigged game of bailouts: how banks dodge their losses, who really foots the bill, and why it’s fueling inflation that’s squeezing your wallet. The Federal Reserve, despite its official-sounding name, isn’t a government agency—it’s a private institution, a bank for banks, established in 1913 to serve their interests under the guise of stabilizing the economy. Its real role? Enabling banks to take massive risks, knowing they’ve got a safety net when things go wrong. When loans sour, bankers don’t pay the price—taxpayers do, through Fed money printing that erodes savings and drives higher prices. Let’s look into this high-stakes “game” and see how it’s costing you more than you think.
Money from Thin Air
Banks have a superpower: they create money out of nothing. We will get into the mechanism of money creation in a future post but for now, will keep things simple. When you borrow—whether it’s a $300,000 mortgage, a $20,000 car loan, or a $10 million business credit line—the bank doesn’t pull cash from a vault. It types numbers into a computer, conjuring “checkbook money” that didn’t exist moments before. On their balance sheet, that loan is an asset (they expect repayment plus interest, their profit) and a liability (they owe that money to depositors, other banks, or anyone who demands it). This isn’t just clever accounting—it’s the engine of our monetary system, where every loan births new dollars into existence.
Here’s the deal: if you repay, the bank keeps the interest—pure profit since the principal cost them nothing but keystrokes. If you default, the asset vanishes (no repayment coming), but the liability lingers. Those dollars are still circulating—someone, somewhere, can claim them, and the bank’s on the hook. Small defaults, like a missed credit card payment, are manageable; banks dip into shareholder capital or profits to cover them. But when defaults pile up on bigger loans—think $500 million to a foreign government or $2 billion to a real estate empire—the losses can dwarf the bank’s equity, pushing it toward insolvency. One bad bet can spiral into a crisis.
Why do banks chase these risky deals? Profit and protection. A single $100 million loan to a corporation generates more interest with less hassle than thousands of $50,000 small-business loans. Plus, banks know they’re not alone. The Federal Reserve, FDIC, and even Congress stand ready to swoop in, ensuring big players don’t fail. This isn’t a glitch—it’s a design that encourages banks to swing for the fences, confident that if they strike out, someone else will cover the tab. For you, that means higher costs—through inflation, fees, or taxes—while banks keep raking it in.
The Bailout Blueprint
Banks don’t face these risks solo. They’ve got a safety net woven by the Federal Reserve, the FDIC (Federal Deposit Insurance Corporation), and sometimes obscure agencies. The excuse? If major banks collapse, the economy could implode—think mass layoffs, frozen credit markets, and supply chain chaos. Look at the 2023 failures of Signature Bank and Silicon Valley Bank: depositors were locked out, ATMs went dark, and panic spread like wildfire. Businesses couldn’t pay workers; startups faced ruin. In the end, regulators stepped in, and the banks were “made whole.” But at what cost? Here’s how the bailout playbook works:
Keep the Loan Alive: Writing off bad loans is a bank’s nightmare—it slashes profits and risks insolvency. Instead, they roll over the debt. If a borrower can’t pay—like a corporation drowning in interest—the bank creates more money from nothing and lends it to cover the interest, keeping the loan as an asset. This buys time, inflates the bank’s balance sheet, and boosts apparent profits, since bigger loans mean bigger interest payments. For example, a struggling retailer might get a fresh $50 million to stay afloat, ensuring the bank’s interest stream doesn’t dry up.
Sweeten the Deal: If the borrower’s still sinking, the bank doesn’t cut them loose—they double down. They lend even more, not just for interest but for new spending—say, to expand factories or fund government programs. This keeps the borrower hooked, like a gambler chasing losses. For banks, it’s a jackpot: larger assets, higher interest, and no immediate write-off.
Reschedule to Delay: When interest payments become crushing—eating a company’s entire profits or a government’s tax revenue—banks reschedule. They slash rates or stretch repayment over decades, making the burden seem lighter. It’s cosmetic: the debt grows, and full repayment becomes a fantasy. Take Argentina’s debt crisis in the early 2000s: banks extended terms, keeping loans on the books while collecting interest, delaying the inevitable. The loan stays an asset, and the bank avoids a hit—temporarily.
Pass It to Taxpayers: When all tricks fail, and the borrower flat-out can’t pay, banks don’t eat the loss. They team up with the borrower—say, a failing corporation or a broke government—and pitch Congress: “If this loan defaults, the economy will tank—factories will shutter, pensions will vanish, markets will crash.” Congress, sold on “saving the public,” either funds the loan directly or guarantees future payments. The loss shifts from the bank’s ledger to taxpayers. In 2008, the bailout of AIG funneled $180 billion to banks like Goldman Sachs, with taxpayers left holding the bill.
This playbook isn’t random—it’s a calculated strategy to shield banks from their own gambles. Each step delays accountability, inflates debt, and sets up the final handoff to the public.
Why Banks Take Big Risks
The bailout system fuels reckless lending. Big loans deliver massive interest with minimal effort. If they go bad, the government’s more likely to step in, citing “systemic risk.” A collapsing pension fund or a defaulting country could spark chaos—unemployment, frozen trade, market crashes—so Congress acts, claiming it’s “too big to fail.” Small borrowers? Tough luck. If your local business goes under, it’s just a local tragedy—no bailout needed.
Banks also love loans that never get paid off. Repayment means finding new borrowers, which is a hassle. Interest is the real goldmine. That’s why they’re obsessed with lending to governments, like through U.S. Treasury auctions. Every week, the U.S. pays old debt by borrowing more—$36 trillion today and counting. Banks know the government’s books are a mess, with deficits piling up faster than tax revenue can cover. Yet they keep lending, collecting interest, and rolling over the debt, confident the cycle won’t break. It’s not just the U.S.—look at Japan or Italy, where banks happily fund endless deficits, knowing repayment is a dream.
This isn’t blind optimism; it’s a bet on the system. Banks lean on the Fed’s ability to print money and Congress often backstops losses. In the 1970s, banks poured billions into third-world nations, only to see defaults loom. Did they panic? Nope—they got bailed out through IMF loans and U.S. guarantees, passing the cost to taxpayers. The bigger the loan, the bigger the bailout, and the less banks worry about risk.
The FDIC
The FDIC is sold as a shield for depositors, insuring accounts up to $250,000. Sounds comforting, right? But it’s not real insurance—it’s a promise that fails if we look closely. Unlike car insurance, where reckless drivers pay higher premiums, all banks pay the same FDIC assessment rate, no matter how risky their loans. This rewards carelessness: banks chasing high-interest, high-risk loans—like subprime mortgages in the 2000s—face no penalty and lean on the FDIC if things implode.
The FDIC’s fund is laughably small. As of 2024, it held $137 billion against $18 trillion in commercial bank deposits—about 76 cents per $100. A single major failure, like Washington Mutual in 2008, burned through $5.4 billion of the fund. A few big collapses could erase it entirely. When that happens, the FDIC runs to Congress, who tap the Federal Reserve to print more money. That cash covers depositors, but it’s a drop in the bucket compared to the economic ripples.
Banks hide insolvency for years through creative bookkeeping, operating with approx. 3% of deposits in cash. The rest? Loaned out on risky bets—real estate bubbles, foreign debt, you name it. If depositors panic and demand their money—like Silicon Valley Bank (SVB) and Signature Bank—the truth spills out: there’s not enough cash to go around. The FDIC steps in as a last resort, but it’s a weak backstop.
Inflation
Here’s where it stings. Bailouts rely on the Federal Reserve printing money from nothing. That new cash floods the economy, chasing the same goods and services. More dollars mean each one buys less, driving up prices for groceries, gas, and rent. Inflation - although has many causes - it isn’t “greedy” businesses or workers demanding raises—it’s in part from the bailout game at work, devaluing your money while banks skate free.
Take 2020–2022 as a case study. The pandemic shut down businesses and left millions jobless. The government responded with $5 trillion in stimulus—PPP loans, direct checks, unemployment boosts. With a national debt already at $23 trillion then ($36 trillion today), that money didn’t come from taxes; the Fed printed it. This wasn’t just aid—it was an economic bailout, pumping dollars into a stalled system. The catch? Money supply goes up, value of that money goes down. It was like an economic rush that drove prices up but giving away “free” money. Prices soared, with inflation hitting 9.1% in June 2022, the highest in 40 years. How’s it repaid? Through future taxes, meaning you’re on the hook for decades. The stimulus created a boom—stock markets rallied and recently at an all time high, spending surged—but it masked cracks leaving us with a pricier, shakier economy. This has just delayed the “soft landing” you hear about.
Breaking the Cycle: Let Banks Fail, Hold Hard Assets
So, how do we stop this runaway train? One radical fix is to let banks fail. Sounds scary, right? We’re told that bank failures would ruin the economy—jobs lost, businesses shuttered, chaos in the streets. This is true for the short term, but propping up reckless banks with bailouts only kicks the can down the road, piling debt on taxpayers and fueling inflation that eats your purchasing power. Allowing insolvent banks to collapse would force accountability. If a bank bets big on shaky loans—like $1 billion to a collapsing real estate fund—and loses, its shareholders and executives should take the hit, not you. In a free market, failure isn’t the end; it’s a reset. Stronger banks would step in, buying up assets at fire-sale prices, while depositors with insured accounts (up to $250,000) would still be protected by the FDIC’s existing fund. Smaller, prudent banks—like local credit unions that avoided subprime madness in 2008—would thrive, lending cautiously to businesses and families who actually repay.
Letting banks fail breaks the moral hazard baked into the system. Right now, banks know the Fed and Congress will save them, so they chase risky, high-profit loans without fear. Remove that safety net, and they’d think twice before dumping billions into questionable ventures, like crypto-linked bets that sank Signature Bank in 2023. The short-term pain of a failure—like a few bank closures or stock market dips—pales compared to the long-term cost of bailouts: trillions in printed money, a devalued dollar, and prices you can’t keep up with. Sweden tried this in the 1990s, letting some banks fail during a financial crisis. The result? A leaner, more disciplined banking sector and a faster economic recovery than countries that bailed out everyone.
Now, letting banks fail protects the system, but what about your money? This brings us to hard assets—things like gold, silver, real estate, or even farmland. Unlike dollars in a bank account, which lose value as the Fed prints more, hard assets hold intrinsic worth. Gold, for instance, has been money for centuries; when inflation hit 9.1% in 2022, its price climbed 7% while the dollar’s purchasing power tanked. Real estate, despite market swings, tends to keep pace with inflation—your house might not make you rich, but it’s not evaporating like cash savings earning 0.5% interest. Hard assets aren’t perfect; they can dip in value, and they’re less liquid than a checking account. But they’re a hedge against the bailout-driven inflation that’s guaranteed when the Fed cranks the money printer. In 2008, while bank accounts stagnated under low rates, gold jumped 30% over two years. Holding hard assets means your wealth isn’t at the mercy of a system that punishes savers to save banks. If you want to question gold more, lets compare it to Warren Buffet by looking at a recent tweet by Lyn Alden on X last night, full post here:
Why’s this better? Dollars in a bank are a bet on a rigged game—your savings are loaned out, gambled on risky ventures, and eroded by inflation when bailouts flood the economy. Hard assets are a bet on reality—tangible things people need, not numbers the Fed can dilute. They’re not a cure-all, but they’re a shield, letting you sidestep the fallout when banks’ bad bets inevitably come due.
What’s Next?
In our next post, we’re diving into the corporate side of this bailout playbook—think giants like General Motors (GM) and Chrysler. These aren’t just banks dodging losses; they’re massive companies propped up with billions in taxpayer-backed loans, sold as “essential” to jobs and the economy. We’ll unpack how Chrysler’s 1979 rescue—$1.5 billion in loan guarantees—kept banks like Chase Manhattan afloat while saddling the public with the bill, and how GM’s 2008 bailout funneled tens of billions through the Fed’s money machine to save them. Look for Behind The Vault Part 4 on next Friday, April 12—because understanding these moves is the first step to protecting what’s yours.
Ready to Protect Your Legacy?
Don’t let bailouts and inflation erode your hard-earned wealth. At Eagle Legacy Planning, we specialize in shielding your future with strategies that outsmart the Fed’s money games—think hard assets, tax-smart plans, and more. Book a free consultation today below and don’t forget to subscribe to have these delivered right to your inbox. Take control before the next bank gets a free ride on your dime!