FDIC

Economics Economics Questions
1

Hello folks, today I want to ask some questions about the FDIC.

To my understanding, the FDIC secures up to $250,000 (currently) of individual’s money stored in a bank. Now, I assume that this money isn’t backed by real savings but rather printed by the fed when it’s needed. However, a friend that I am currently debating tells me this:

"FDIC money comes from fees placed on the banks. It is not printed by the Fed.

Inflation is an entirely different topic than banking deposit insurance.

FDIC does not bailout any banks. It repays the customers, the depositors. the stock is wiped out.

the major ‘banks’ that had to be bailed out recently, were not FDIC banks, because they weren’t really banks. they were ‘shadow banks’ enabled by the deregulation of the last decade or so. the systemic failure that resulted eerily matches the pre-Great Depression financial system.

Again, before the FDIC, banks failed commonly. Look up how many systemic financial meltdowns, with respective stock market crashes, there were in the decades before the Great Depression. Then compare to the decades after the Great Depression. Lots, to none. Austrian theory cannot explain that. there’s many fancy philosophical ways to explain it, but it boils down to humans are not perfectly logical, so pure capitalism is doomed to failure. mixed economies, those based in capitalism, but with a proper, limited, role of regulation, have historically always performed best. of course, how much regulation is best is debateable, and that’s where the real argument is. the argument that all reguation is bad, that is not an economic argument, it is a fundamentalist political one."

I’ve tried explaining to him that bank failures were a result of fractional reserve banking and that the fed is the root of the economics problems we have today. He goes on to say that Keynes theories are “stunningly accurate”.

Is there anything else I can tell this clown to silence him?

2

It’s actually 250k in any one account. So you can have more than one account and have them all secured as long as none of them are over 250k.

3

Well, first you have to make sure you have all your facts right.

This is not completely correct. The FDIC does have a capital stock for the purpose of backing deposits. However, the FDIC is a ruse, it cannot protect against systemic risk because its capitalization is barely 1% of the deposits it insures. Today, it is much less since the FDIC has been hit repeatedly by numerous bank failures since late 2008.

But you are right that the reason the FDIC has such ridiculously low capitalization (what’s the point of insuring deposits which already have 10% backing with a 1% capitalization??) is that it is implicitly backstopped by the Fed. There can be no doubt that whatever measures had to be taken to re-capitalize the FDIC would be taken, and that means firing up the printing presses over at the Fed.

Well, he’s actually right that central banking ended bank failures. What you’re not connecting is the causal relationship between the absence of bank failures and the existence of very fractional-reserve banking. Without a central bank to act as “lender of last resort”, that is, bailer-outer of last resort, fractionally reserved banks are at all times liable to failure as a result of bank runs. The central bank is the Banking Cartel HQ. Unlike every other good and service, apparently banking defies the laws of economics and actually benefits from cartelization and the reduction or elimination of competition.

The Fed is the root cause both of our economic ills and of the absence of bank failures. It should not be assumed that the absence of bank failures is a good thing. Banks that go bankrupt ought to fail. The illness arises as a result of propping up bad businesses.

Clayton -

4

“This is not completely correct. The FDIC does have a capital stock for the purpose of backing deposits. However, the FDIC is a ruse, it cannot protect against systemic risk because its capitalization is barely 1% of the deposits it insures. Today, it is much less since the FDIC has been hit repeatedly by numerous bank failures since late 2008.” - ClaytonB

BINGO! Ruse is probably the best word for it, though I would have chosen bullshit or sleight of hand. It’s just a way to make people feel warm and fuzzy about having money in a bank. However, I think you were overly kind in your assessment of the rest of his friend’s explanation.

“FDIC money comes from fees placed on the banks. It is not printed by the Fed.”

Like you say, true but meaningless because the FDIC has no hope of paying back under systemic failure.

"Inflation is an entirely different topic than banking deposit insurance.

“FDIC does not bailout any banks. It repays the customers, the depositors. the stock is wiped out.”

Jargonism masquerading as reality. The depositors are paid back with their own tax dollars and/or newly printed money because the FDIC has no hope whatsoever of paying them back with its available funds.

“the major ‘banks’ that had to be bailed out recently, were not FDIC banks, because they weren’t really banks. they were ‘shadow banks’ enabled by the deregulation of the last decade or so. the systemic failure that resulted eerily matches the pre-Great Depression financial system.”

Shadow banks and deregulation my ass. The banks were not deregulated, a certain portion of GS was changed, not rescinded or repealed, to allow mixed banking and this facilitated the creation of bad debt which lead to the current shit storm, however it doesn’t explain where the money and incentive came to buy all that shit debt.

“Again, before the FDIC, banks failed commonly. Look up how many systemic financial meltdowns, with respective stock market crashes, there were in the decades before the Great Depression. Then compare to the decades after the Great Depression. Lots, to none. Austrian theory cannot explain that.”

He has some reading to do…

“there’s many fancy philosophical ways to explain it, but it boils down to humans are not perfectly logical, so pure capitalism is doomed to failure.”

I’d agree pure capitalism is doomed to failure, but it’s not because people aren’t logical, it’s because people are assholes and to a given extent like screwing with each other rather than leaving each other the hell alone and just dealing voluntarily and civily with each other.

“mixed economies, those based in capitalism, but with a proper, limited, role of regulation, have historically always performed best.”

Correlation does not equal causation and someone should let this guy know that.

“of course, how much regulation is best is debateable,”

Actually it’s not, because it’s also a historical fact that the more regulation and control there is, the worse things get. So if you’re going to do something even as simple as drawing a trend line, the freer the better.

“and that’s where the real argument is. the argument that all reguation is bad, that is not an economic argument, it is a fundamentalist political one.”

Sounds like Bill O’Reilly in that he wants to set the terms of ‘acceptable’ debate. Anarcho Capitalism, whether he agrees with it or not, is a system people are free to advocate for if they so choose. And in actuality no one is arguing that all regulation is bad, but that self regulation is more efficient and more consistent with a free society than categorical regulations/restrictions which are centrally generated and enforced.

5

Thanks, guys. You people are an incredible source of knowledge.

Looks like I have to concede that I didn’t know as much about about FDIC as I thought. My gut feeling told me it is a sham that gives people a warm fuzzy feeling about their money but is based faulty reasoning.

I’d like to examine this part of his argument:

Again, before the FDIC, banks failed commonly. Look up how many systemic financial meltdowns, with respective stock market crashes, there were in the decades before the Great Depression. Then compare to the decades after the Great Depression. Lots, to none. Austrian theory cannot explain that.

Emphasis mine.

Doesn’t Austrian theory fault fractional reserve banking for these bank runs?

6

“Is there anything else I can tell this clown to silence him?”

No.

Anybody who believes that Business failures can be insured is a clown.

Anybody who believes that Fractional Reserve Banking can be in insured is a super clown.

“Doesn’t Austrian theory fault fractional reserve banking for these bank runs?”

Yes. Obviously, the phenomenon of “bank runs” is nonsensical in the absent of fractional reserves.

7

He is correct. The FDIC is “insurance” in the sense that every bank has to pay an insurance fee to the FDIC in order to have its accounts insured. What the FDIC does is promote risky loans. This is because the bank can make more money if it offers higher interest rates to customers and then uses their money to bet on risky loans (which charge higher interest than non-risky loans). Because the bank customers are insured by the FDIC, they don’t care about the risks their bank takes. Thus, the FDIC subsidizes risk taking by banks, so that bank failures and financial crises are now more likely.

8

“Doesn’t Austrian theory fault fractional reserve banking for these bank runs?” - WhoRunIt

To expound a bit on what DD5 said, before the central banking system was in place you had half way house measures on the way to central banking. There’s no such thing as a bank run if a bank can pay all its liabilities. Hence, bank runs are a fundamental problem of fractional reserve banking. And when you look at every episode in history where bank runs have occurred you usually find a legal structure with no development of bailment law, much less as it relates to banking and storage of gold, which allows bankers to lend beyond their means, and/or a concerted effort on the part of the government to debase the money supply. The simple reason for this is that banksters aren’t a new phenomena, they’ve been around for centuries. And one of the time tested arrangements in history is governments facilitating the thievery of the politically connected at the expense of the rest of us. The mechanism has changed over time, but it’s the same game. In that light, you can consider FDIC to kind of like getting the same number of newly minted coins back. You handed in 10 old gold coins to the blessed government to remint them, got ten back, shiny and new! Only they have half the gold content and you find that out when you go to spend them. Likewise, getting the same nominal amount of ‘money’ back from FDIC if your bank buys the farm makes you feel good until you go to spend it, and then you realize they paid you back with some tax money that you yourself gave them, and by essentially stealing value from your future wages.

9

No, bank runs are the result of bank customers panicking (look at the bank run that occurred in 2008 at IndyMac bank). Bank customer panic is often a result of rumors of bank insolvency. But a bank run is not a problem unless the rumors are true. And that’s only the case if the bank has uncovered deposits, that is, fractional reserves.

Central banking solves this problem by creating a bank cartel with the power to print money. All bank runs can now be satisfied with counterfeit - err - I mean “flexible” money hot off the presses from the central bank. The Federal Reserve is modeled on the Bank of England which has been running this game for centuries.

Clayton -

10

That’s a lie. All banks practice fractional reserves, almost all are solvent.