A Bailout By Another Name

November 24th, 2009

By Brianna Aubin

FDICSince its inception in 1933, the Federal Deposit Insurance Corporation has safeguarded our nation against the possibility of bank failure.  And give FDR credit where credit is due, the FDIC was able to keep people from having bank panics for over 70 years by perception alone.

But have you ever asked yourself what might happen if the FDIC went broke?

Two months ago, the FDIC gave an interview to NPR about its financial state, saying that they were running out of money as bank failures mounted.  Their solution?  Demand that the surviving banks pay their next three years’ worth of insurance premiums in advance, a sum that adds up to $45 billion ($45,000,000,000 when the zeros are attached).  My personal translation of the official interview is as follows:

NPR: Should we be worried about the state of our banks?

FDIC: Nah.  We’ve got a $100 billion line of credit with the Treasury Department and can borrow four times that with the approval of the Treasury secretary and the Fed.

NPR: So… if you’ve got all this money lying around, why take $45 billion from the banks?

FDIC: The Treasury’s broke and we don’t want the public to see that we’re getting another bailout.  But don’t worry, we’re letting the banks cook the books so that it will look as though they’re making the payments during the regular time.  And anyway, if the banks really can’t handle it we’ll let them beg us for a special exemption.

NPR: But won’t taking such a huge chunk of change from the banks stifle lending and make the recovery more difficult?

FDIC: Well, it’ll kill some banks at the margin, but don’t worry, there are still a lot of healthy banks that are sitting on reserves right now; forcing them to disgorge won’t push them past the edge.  Besides, there’s over $800 billion in excess reserves sitting on deposit at the Fed right now; we’re only asking for 5% of that.

NPR: If there’s so much money in the reserve accounts, why aren’t the banks lending it?

FDIC: Partly because people aren’t doing things that require loans, partly because banks are refusing to give money to people who want it.

NPR: How much money do banks pay the FDIC, anyway?

FDIC: 12 to 16 cents for every $100 in deposits right now.  But we’re raising that.

NPR: Will these changes get the FDIC out of the woods?

FDIC: We hope so, but you never know.  We might have to do some more looting…  ahem, I mean, make some more adjustments to the system… in a few years.

Some people will perhaps take umbrage at the blunt nature of my “translation,” but their outrage does not change the fact that the root of the FDIC’s plan is to essentially take from the banks that have the reserves to survive the recession in order to help subsidize the banks that do not.  That getting into debt in this economy is actually a pretty bad idea for anyone right now has apparently never occurred to them.  That the reason these banks are still healthy is precisely because they have been accumulating excess reserves and being careful about their lending has apparently escaped them.  That this policy will serve only to stifle lending further and create even more bank failures than we have already seen is apparently no concern of theirs.

Not too long ago, I wrote an article which compared money to seed corn, an item that could either be eaten immediately or planted (invested) in order to create more.  A lot of people who read the article probably didn’t quite get it; perhaps this example will help to clear up some of the confusion:

The people of Sand Creek, Illinois, had been placed on national relief, but no food could be found for them in the empty granaries of the nation at the frantic call of the moment — so the seed grain of the farmers of Nebraska had been seized by order of the Unification Board — and Train Number 194 had carried the unplanted harvest and the future of the people of Nebraska to be consume by the people of Illinois. “In this enlightened age,” Eugene Lawson had said in a radio broadcast,we have come at last, to realize that each of us is his brother’s keeper.” — Atlas Shrugged

The banks are being put on relief, but since no money can be found for them at the Treasury or the Fed at the frantic call of the moment, the FDIC is instead seizing the reserves of the banks that still have the ability to survive, taking the uninvested future of the depositors of those banks to be consumed by the depositors of the banks that have failed.  Truly we have all become our brothers’ keepers.


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3 Responses to “A Bailout By Another Name”



  1. larry |

    Brianna
    Once again you have delivered an excellent thought provoking article. I was much impressed by the previous “Corn” analogy that you referenced in this piece. Now if we can just get someone to listen.


  2. Tom |

    I agree with Larry — great work! There’s a good article at The Wall Street Journal today that supports what you’re saying and gives some additional details.

    The bailouts and economic stimulus packages are having unintended consequences all over the place. It seems we might have been better off taking a hands-off approach to the economy — businesses that can’t make it go under, more successful businesses fill the gaps, and the economy takes care of itself. Maybe that wouldn’t have worked very well, but I’m beginning to wonder how much worse it could have been.


  3. Harvey |

    Loved your blunt “translation” as well as the very relavent quote from “Atlas Shrugged”.

    Another appropriate quote for our times:

    “To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.” – Thomas Jefferson


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