Bair Market

Forbes ^ | 11/4/2009 | Steve Forbes

[bruinbirdman]

The Federal Deposit Insurance Corporation is fast running out of money, thanks to more and more bank failures. To replenish its depleted kitty the FDIC recently said it would require healthy banks to make three years of advance payments for future premiums by the end of this year rather than hit them with new assessments. Alas, this is really semantics: The FDIC will still be sucking money from the banking system to finance bank foreclosures, which means less money for loans to sound businesses and consumers. It goes squarely against FDIC Chairman Sheila Bair's stated declaration that "we need them [banks] to lend into the economy right now."

Why couldn't the Treasury Department or the Federal Reserve simply have advanced money to the FDIC? When the economy and financial system are truly functioning and healthy again, the FDIC could levy assessments and repay the borrowed funds.

This whole episode underscores how government actions far more often than not hurt the economy rather than help it. Over the years the FDIC has had a nasty habit of lowering or eliminating deposit insurance premiums when times are good and scrambling to find funds when a crisis hits. It should be doing just the opposite: collecting reserves when times are flush and lowering premiums when the banking system is under stress. Instead, the FDIC behaves in a procyclical manner.

Unfortunately, the FDIC is not alone in such weird behavior. Financial regulators are still pressing banks to boost their capital and tighten lending standards. The sensible approach, again, would be the opposite: encourage banks/financial institutions to lend money to small businesses and consumers, not in a reckless way but to ensure that those who are sound aren't destructively made insolvent because of a reluctance to roll over loans and to charge

[Roccus]

“Bank Holidays” are just over the horizon.